By Cordell Eddings and Susanne Walker Oct. 17 (Bloomberg) — Treasuries fell for the second week as reports on manufacturing and industrial production added to evidence of an economic recovery, tempering investors’ quest for higher-returning assets amid subdued inflation. The difference in yields between two- and 10-year notes widened by 0.04 percentage point to 2.46 percentage points, the the consecutive weekly steepening of the yield curve. The Treasury is slated announce on Oct. 22 how much 2-, 5- and 7- year debt it will auction the following week. “This week the back end of the curve suffered from positive economic data and equity market strength,” said Christian Cooper , an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade with the central bank. “The tone of the market is changing from just cash on the sidelines looking for yield to more of a relative value play.” Ten-year note yields rose three basis points, or 0.03 percentage point, to 3.42 percent this week, according to BGCantor Market Data. The 3.625 percent security due August 2019 fell 9/32, or $2.81 per $1,000 face amount, to 101 11/32. Yields on two-year note were little changed at 0.95 percent, while 30-year bond yields rose two basis points on the week to 4.24 percent. U.S. stocks climbed for a second week after results from JPMorgan Chase & Co. and Intel Corp. exceeded estimates, lifting the Dow Jones Industrial Average above 10,000 for the first time in more than a year. Fed Minutes Industrial production in the U.S. rose more than anticipated in September, the Federal Reserve said yesterday. The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August. The Fed Bank of New York said the day before that its general economic index soared to the highest since mid-2004 while a gauge of Philadelphia-area manufacturing declined. Minutes of the central bank’s September meeting released Oct. 14 showed some policy makers raised their second-half economic projections based on improved housing markets, consumer spending and growth outside the U.S. Policy makers will be ready to tighten credit when the economic outlook “has improved sufficiently,” Fed Chairman Ben S. Bernanke said last week. “The Fed remains more concerned about the sustainability of a recovery and the near-term risks to inflation are on the downside,” David Ader , head of U.S. government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC, wrote in a note to clients. “We continue to favor a flatter curve and see this week’s front-end supply announcements and subsequent auctions as providing some tactical steepening relief.” Chinese Demand International demand for long-term U.S. financial assets strengthened in August as Japan increased its holdings and investors accumulated Treasuries. Total net purchases of long-term equities, notes and bonds totaled $28.6 billion for the month, compared with net buying of $15.3 billion in July, the Treasury Department said yesterday. Investors and central banks worldwide have sought a haven from market turmoil by buying Treasuries, which last year posted the best returns since 1995. China remained the biggest foreign holder of U.S. Treasuries, even after its holdings fell $3.4 billion to $797.1 billion. Japan, the second-largest holder, increased its holdings $6.5 billion to $731 billion. Russia’s holdings rose $3.6 billion to $121.6 billion. The U.S. government’s annual budget deficit widened to a record $1.42 trillion as the deepest recession since the 1930s crippled tax revenue and the administration increased spending to rescue the economy. ‘Grab Some Yield’ The shortfall for the 12 months ended Sept. 30 was more than triple the $455 billion record set a year earlier, the Treasury Department said yesterday in Washington. “This could be an opportunity to grab some yield,” said Gary Pollack , who helps oversee $12 billion as head of fixed- income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The economic news, while mixed, still portrays an economy which could fall short of people’s expectations.” Treasury yields may fall below 3 percent this year as cash- rich U.S. banks shift money to “plain” government debt that has suddenly become “juicier” due to cheap funding costs, said Mizuho Securities Co. Low-funding costs from deposits are making Treasuries more like the “fatty steak” of high-yielding securities that banks had to flee in the wake of the global financial crisis, said Hajime Takata , chief strategist at primary dealer Mizuho Securities, a unit of Japan’s second-biggest bank. ‘Nice Profits’ U.S. banks’ excess of deposits over loans has surged to a record, gaining an average 30 percent per month since March. “Since the bursting of the asset bubble and the plunge in funding rates, banks are likely to recognize that Treasuries can deliver relatively nice profits,” said Takata. U.S. debt handed investors a return of 5.9 percent over the past year, according to Merrill Lynch & Co.’s Treasury Master Index. German bunds gave 9.1 percent and Japanese government bonds delivered a 3.4 percent gain. Treasuries are down 0.7 percent this month, the indexes show. Domestic Demand Treasuries are “relatively cheap” compared with European and Japanese government debt, as 10-year yields are likely to fall to April levels, according to primary dealer RBS Securities Inc. Demand from domestic households and banks will support the Treasury market, helping push 10-year rates to 3 percent by year-end, said Brian Lancaster , head of asset-backed debt strategies at RBS in Stamford, Connecticut. Longer-dated bonds may outperform shorter-maturity notes on speculation the U.S. consumer price index has yet to reach bottom, he said. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was at 1.98 percentage points. The spread averaged 2.18 percentage points over the last five years. Futures on the Chicago Board of Trade show a 59 percent chance the Fed will boost its target rate for overnight lending between banks by April. The Fed cut its benchmark rate to a range of zero to 0.25 percent at the end of 2008. The world’s largest economy shrank at a 0.7 percent annual rate in the second quarter, the Commerce Department reported last month. Gross domestic product contracted at a 6.4 percent pace in the first three months of 2009. Economists forecast the current-account deficit will rise to 3.2 percent of gross domestic product in 2010 and 3.3 percent in 2011, compared with 2.9 percent this year. Corporate Earnings So far, 80.4 percent of companies in the index beat third- quarter earnings estimates. That compares with 72.3 percent during the entire April-through-June period, which matched the highest proportion in Bloomberg data going back to 1993. “The market was priced for a slower recovery and earnings and stocks are putting some pressure on the expectation for slower growth,” said Lawrence Dyer , an interest-rate strategist in New York at primary dealer HSBC Securities USA Inc. “People are going to be reactive and sensitive to the economic data next week as the market is very neutral right now.” To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net ; Cordell Eddings in New York at ceddings@bloomberg.net .
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Treasuries Decline for Second Straight Week Amid Signs of Economic Growth
