Treasury Cash Avalanche. Holders of U.S. government notes and bonds will be handed a net $71 billion this week from maturing debt and interest, a record, according to the research unit of Jersey City, New Jersey-based ICAP Plc, the world's biggest inter-dealer broker. In all of last year, the Treasury returned $73 billion more to investors than it sold.
Treasury Cash Avalanche Offers Respite for Bond Bears (Update2)
By Sandra Hernandez and Daniel Kruger
May 12 (Bloomberg) -- Treasury investors beset by rising debt sales and faster inflation are about to get a reprieve.
Holders of U.S. government notes and bonds will be handed a net $71 billion this week from maturing debt and interest, a record, according to the research unit of Jersey City, New Jersey-based ICAP Plc, the world's biggest inter-dealer broker. In all of last year, the Treasury returned $73 billion more to investors than it sold.
Much of that money may be funneled back into Treasuries because the economy shows few signs of accelerating and banks and securities firms are still reporting losses from securities tied to subprime mortgages. Vikram Pandit, chief executive officer of Citigroup Inc., said on May 9 that he plans to sell about $400 billion of assets over the next three years as part of his plan to make the biggest U.S. bank profitable again.
``The question is, where are you going to go'' if not Treasuries, said Seth Plunkett, a bond fund manager at Mountain View, California-based American Century Investments, which oversees $21 billion in fixed-income assets. ``A lot of people are going to get hurt'' chasing higher yields in non-government securities as the economy slows, he said. ``If they're smart, they'll be going back into Treasuries.''
Government debt lost 1.7 percent in April, including reinvested interest, making it the worst month since 2004, according to Merrill Lynch & Co. indexes. Now, investors such as Plunkett are looking forward to the windfall to buy Treasuries they say have become relatively cheap. The slump had pushed yields on two-year notes to almost a half-percentage point above the Federal Reserve's benchmark interest rate, the most since December 2005.
Quarterly Auctions
Yields on two-year notes closed last week at 2.24 percent, down 30 basis points from May 2, according to BGCantor Market Data. They reached 2.54 percent on May 2, the highest since Jan. 17. Yields on 10-year notes fell 9 basis points to 3.77 percent, after touching a more than two-month high of 3.95 percent on May 7. A basis point is 0.01 percentage point. Treasury yields were little changed today as of 8:48 a.m. in London.
The government will pay $74 billion on May 15 to holders of maturing 3-, 5-, and 10-year Treasuries, and $17.7 billion in interest on outstanding notes and bonds. Last week it raised $21 billion from its quarterly auction of 10-year notes and 30-year bonds, bringing the net payment to $71 billion. The current record is $63 billion, on Aug. 15. The figures exclude bills.
`Good Portion'
``A good portion will come back'' to the Treasury market, Thomas Tucci, the head of U.S. government bond trading at RBC Capital Markets in New York, said in a Bloomberg Radio interview May 6. ``We expect it to be seasonally a very positive period for Treasuries as we move through this month and go into June.'' The firm is the investment-banking arm of Canada's biggest bank.
Investors still must contend with a rising supply of bonds as the government enlarges its debt auctions to finance a budget deficit, and as the Fed sells $80 billion to $100 billion of its Treasury holdings to offset new lending programs, according to projections by New York-based Morgan Stanley.
Between January and April, the U.S. sold $108 billion in two-year notes, a 46 percent increase from a year earlier.
Another headwind is inflation, which rose at a 4 percent annual pace in March, double the rate in August. Plus, the Fed's efforts this year to boost confidence in financial markets may fuel demand for higher-yielding assets such as corporate and mortgage-backed debt.
`More Attractive'
``You could still go out there and buy mortgage assets and high-quality credit at much more attractive levels,'' said Stuart Spodek, co-head of U.S. bonds at New York-based BlackRock Inc., which manages $513 billion in debt.
The May auctions mark the start of what is historically the best period of the year for Treasuries.
Ten-year note yields declined an average of 50 basis points between May and October in 16 of the last 20 years, according to data compiled by UBS Securities LLC in Stamford, Connecticut. The firm is one of the 20 primary dealers that trade with the Fed. That compares with a 32 basis-point increase from the end of January to May for most of the past two decades.
``There tends to be this bearish move into the May refunding,'' said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, another primary dealer. ``It is reasonable to say that soon after the May refunding we begin to enter what is the longest bullish phase of the year.''
Rising Stocks
Forces that tend to work against Treasuries early in the year, including rising stocks and commodities and corporate debt sales, often diminish around the time of the May sales, he said.
Even without maturing debt, Treasuries are attractive because of a slowing economy, said Daniel Shackelford, a bond fund manager at T. Rowe Price Group Inc. in Baltimore.
Growth may decelerate to a 0.1 percent pace this quarter, the slowest since the 2001 recession, according to the median estimate in a Bloomberg News survey of 82 economists.
``There's a lot more wood to chop in terms of getting through the economic hurdles in front of us,'' said Shackelford, part of a group that manages $13 billion. ``I don't think it's a bad place to own bonds.'' |
