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Treasuries Climb; 10-Year Yields Fall Most in 17 Months on European Crisis

by on May 28, 2010

By Daniel Kruger and Susanne Walker May 29 (Bloomberg) — Treasuries climbed in May, lowering 10-year yields the most since the Federal Reserve dropped interest rates to a record low in December 2008 to spur the economy, on speculation efforts to contain Europe’s debt crisis will slow the global economic recovery. The gap between yields on 2- and 10-year notes narrowed the most since March 2009 as stocks plunged and stagnant U.S. consumer prices shifted the focus from inflation to deflation. Investors sought the safety of government bonds as European leaders set austerity measures after agreeing on an almost $1 trillion rescue plan. The U.S. added jobs in May for a fifth month, a report may show next week. “There was a realization the problems in Europe weren’t going to be resolved any time soon,” said John Fath , a principal at BTG Pactual in New York and former head Treasury trader at UBS AG. “That just brought a huge bid into our market.” The Treasury 10-year note yield fell 36 basis points, or 0.36 percentage point, to 3.29 percent, from 3.65 on April 30, according to Bloomberg generic data. It touched 3.06 percent on May 25, the lowest since April 29, 2009, seven weeks after reaching an 18-month high of 4.01 percent. The two-year note yield fell 19 basis points in May to 0.77 percent. The Securities Industry and Financial Markets Association recommended trading close yesterday at 2 p.m. New York time and stay shut on May 31 for the U.S. Memorial Day holiday. Stocks Tumble Global stocks plunged on Europe’s debt turmoil. The Standard & Poor’s 500 Index fell 8.2 percent and the MSCI World Index dropped 9.9 percent, the worst month for both since February 2009. The Fed lowered the key interest rate to a range of zero to 0.25 percent in December 2008, three months after the collapse of Lehman Brothers Holdings Inc. It said in March 2009 it would acquire as much as $300 billion in Treasuries. Treasuries extended gains yesterday as Spain’s credit grade was reduced to AA+ from AAA by Fitch Ratings. The company said the “process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term.” The euro fell 7.7 percent against the dollar this month as investors fled riskier assets denominated in the currency. Treasuries handed investors a 1.7 percent return this month to May 27, the most since a 2.3 percent gain in March 2009, a Bank of America Merrill Lynch index showed. ‘Background Shift’ “You had the fundamental background shift very quickly and fear take over the markets,” said Alan De Rose , managing director in government trading and finance at Oppenheimer & Co. in New York. “The situation in Europe is relatively fluid. The economic backdrop of this country may be starting to shift toward slower growth.” The U.S. auctioned $113 billion of 2-, 5- and 7-year notes this week, $5 billion less of the maturities than it sold last month and the smallest sale of the group since September. Each offering drew a lower yield than at the previous auction. Consumer spending in the U.S. unexpectedly stalled in April after a 0.6 percent gain in March, Commerce Department figures showed yesterday in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.3 percent increase. The Fed’s preferred price measure, which excludes food and fuel, rose 0.1 percent in April and was up 1.2 percent from a year earlier. Slower Growth The U.S. economy grew 3 percent in the first quarter, slower than the 3.4 percent forecast in a Bloomberg survey and less than the 3.2 percent initially calculated, Commerce Department data showed on May 27. “The talk about economic momentum has to be in question at some point,” said Thomas Tucci , head of U.S. government bond trading at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Fed. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS , show money managers expect consumer prices to increase an average 2.05 percent annually in the next 10 years, down from the year’s high of 2.49 percent on Jan. 11. The figure was as low as 1.83 percent on May 21, the least since Oct. 9. Investors should bet the so-called breakeven rate will narrow to 1.76, RBC fixed-income strategists including London- based Ian Beauchamp and Richard McGuire wrote in a report received yesterday. Treasury yields will remain low this year as inflation and U.S. growth slow and the Fed keeps interest rates unchanged, primary dealer Goldman Sachs Group Inc. said in a note to clients yesterday. Futures on the CME Group Inc. exchange show a 37 percent chance U.S. policy makers will raise their benchmark rate by at least a quarter-percentage point by their December meeting, down from a 60 percent likelihood a month ago. The Labor Department will say on June 4 that the economy added 508,000 jobs in May, according to the median forecast in a Bloomberg survey, after a gain of 290,000 the previous month. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net ; Susanne Walker in New York at swalker33@bloomberg.net

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Treasuries Climb; 10-Year Yields Fall Most in 17 Months on European Crisis

Cloherty Is Said to Join RBC as U.S. Rate Strategists Play Musical Chairs

by on May 18, 2010

By Daniel Kruger and Cordell Eddings May 18 (Bloomberg) — The game of musical chairs between strategists in the U.S. government bond market is heating up. Michael Cloherty , the former head of U.S. interest-rate research at Bank of America Corp. who was hired by Societe General in March, is joining Royal Bank of Canada as head of U.S. fixed-income rates strategy, according to people familiar with the situation. Cloherty, who left Societe Generale before his official start date, is taking the position vacated at RBC Capital Markets by Ira Jersey , who left to rejoin Credit Suisse Group AG after working at RBC Capital Markets for 16 months. “The old days of the loyalty attached to a company, given the basic restructuring of the investment banking market, are over,” said David Jones , 71, who worked at Aubrey G. Lanston & Co., one of the original primary dealers, for 30 years, rising to vice chairman. “Companies let go of so many people that it broke virtually all loyalty ties. There’s been a complete breakdown.” The number of primary dealers, which underwrite the U.S. government’s debt and trade directly with the Federal Reserve Bank of New York, has increased to 18 firms from a low of 16 last year as issuance rises. Sales of Treasuries are projected to reach $2.43 trillion in 2010, according to a survey of 10 of the primary dealers. In February, Nomura Holdings Inc. hired George Goncalves as head of U.S. rates strategy after he spent about eight months at Cantor Fitzgerald & Co., where he joined from Morgan Stanley. Nomura, which became a primary dealer in July, also hired Stanley Sun from Bank of America in April, and Aaron Kohli , who left Royal Bank of Scotland Group Plc last month. Credit Suisse Cloherty and Jersey worked at Credit Suisse under Dominic Konstam , who left the firm in March to become director for fixed-income research in New York at Deutsche Bank AG. Carl Lantz has taken over for Konstam as head of interest-rate strategy at Credit Suisse. RBC Capital Markets spokeswoman Kait Conetta and Cloherty couldn’t be reached for comment. Societe Generale spokesman, James Galvin declined to comment. BNP Paribas SA hired Kevin Walter to head the primary dealer’s Treasury trading desk, according to a person familiar with the situation. Walter, who joins from Deutsche Bank AG, replaces Jeffry Feigenwinter , who is going to Morgan Stanley. Walter couldn’t be reached for comment. Megan Stinson, a spokeswoman for BNP Paribas, said the firm had no comment. Jennifer Sala , a Morgan Stanley spokeswoman in New York, confirmed that Feigenwinter was joining the primary dealer. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net ; Daniel Kruger in New York at dkruger1@bloomberg.net

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Cloherty Is Said to Join RBC as U.S. Rate Strategists Play Musical Chairs

`Reverse Diversification’ Boosts Global Demand for U.S. Financial Assets

May 17, 2010

By Vincent Del Giudice and Daniel Kruger May 17 (Bloomberg) — “Reverse diversification” boosted global demand for long-term U.S. financial assets to a record as the European fiscal crisis may be beginning to translate into increased demand for dollar assets. Purchases of equities, notes and bonds totaled $140.5 billion in March, more than double economists’ projections, after net buying of $47.1 billion in February, the Treasury Department said today. Treasury purchases rose by the most since June as China, the largest lender to the U.S., added to its holdings for the first time since September. “Diversification was a major deadweight on the dollar last year and reverse diversification is now a major source of vulnerability for the euro,” said Alan Ruskin, head of foreign- exchange strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut. The crisis may result in 2 percentage points of “growth divergence in the U.S.’ favor,” he said in a telephone interview today. Signs of a sustained economic recovery, including a rebound in earnings and stock prices, may increase demand for U.S. investments as concerns mount about the sustainability of government debt in Europe, economists said. The world’s largest economy has expanded for three consecutive quarters and added 573,000 jobs in the first four months of the year. The rise in demand for Treasuries came even as yields rose across the yield curve in March, with 2-year note yields rising to 1.06 percent from 0.80 percent and the 10-year note yields climbing to 3.83 percent from 3.61 percent. Two-year note yielded 0.78 percent, while 10-year note yielded 3.45 percent today. ‘A Safe Haven’ Demand at Treasury auctions from indirect bidders, a class of buyers that includes foreign central banks, rose in April in five of the six maturities that were also sold in March, dipping only for the two-year note. Including short-term securities such as stock swaps, investors abroad purchased a net $10.5 billion, compared with net buying of $9.7 billion the previous month. “Foreign institutions and individuals are still turning to the U.S. as a safe haven,” said Paul Christopher , senior international investment strategist at Wells Fargo & Co. in St. Louis. “There was some concern foreigners were abandoning the U.S. currency. That fear was misplaced.” Economists in a Bloomberg News survey forecast a $50 billion net increase in long-term U.S. financial assets in March, according to the median of seven estimates. China’s Buying Treasury holdings by China rose 2 percent in March to $895.2 billion, the biggest increase since July. China added $18.7 billion in notes and bonds, bringing the total to $854.4 billion. The country’s holdings of bills fell by $1 billion to $40.8 billion, the smallest decline in the shortest-term securities since China add $8.8 billion of bills in July 2009. Japan, the second-largest holder, increased its holdings by $16.4 billion to $784.9 billion in March. Holdings in the U.K. gained $45.5 billion to $279 billion, the fifth straight monthly increase. The Organization of Petroleum Exporting Countries increased its position by $10.7 billion to $229.5 billion. Total foreign purchases of Treasury notes and bonds were $108.5 billion in March compared with purchases of $48.1 billion in February. Foreign demand for U.S. agency debt from companies such as Fannie Mae and Freddie Mac registered net buying of $22 billion in March, the biggest gain since June 2008. The Standard & Poor’s 500 Index in March rose 5.9 percent, its biggest gain since April 2009, while the Dollar Index , a gauge of the U.S. currency’s strength against six other major currencies, gained 0.9 percent. Treasuries declined 0.9 percent in March, according to an index compiled by Bank of America Corp.’s Merrill Lynch unit. Stock Purchases Net foreign purchases of equities were $11.2 billion in March after net purchases of $12.9 billion in February. Investors bought a net $16 billion in U.S. corporate debt in March, the first increase since May 2009, after net sales of $12 billion in February. The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac , which buy home mortgages. Investors may have kept boosting ownership of U.S. financial assets into the second quarter, as fiscal turmoil in Greece led to a 110 billion-euro ($136 billion) bailout earlier this month by the European Union and International Monetary Fund. The euro, which has declined against the dollar in the past five months including a 1.6 percent drop in April, is down about 7 percent this month. “Given the debt crisis that Europe is struggling with, flight to safety will most likely favor the U.S.,” Win Thin , senior currency strategist at Brown Brothers Harriman & Co. in New York, said in a research note today. “Really, would any reserve manager be moving aggressively into euros these past few months?” To contact the reporters on this story: Vincent Del Giudice in Washington at vdelgiudice@bloomberg.net ; Daniel Kruger in New York at dkruger1@bloomberg.net

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Treasuries Advance Over Concerns That Europe Can’t Contain Its Debt Crisis

May 8, 2010

By Daniel Kruger and Cordell Eddings May 8 (Bloomberg) — Treasuries surged, with 10-year note yields registering the biggest two-week drop since December 2008, as concern that Europe’s debt crisis will spread beyond Greece sent investors to the safety of U.S. government debt.     Thirty-year year bonds gained for a fifth straight week, the longest winning streak since the collapse of global credit markets at the end of 2008 drove yields to record lows. The jump in demand comes as the Treasury is scheduled to sell $78 billion in notes and bonds next week. “Any hiccup you see, we’re going to have that flight to quality,” said Richard Schlanger , who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “It can happen again.” The benchmark 10-year note yield slid 38 basis points, or 0.38 percentage point, in the past two weeks to 3.43 percent, according to BGCantor Market Data. It tumbled 23 basis points since it closed April 30 at 3.65 percent. Ten-year yields have plunged as much as 75 basis points since reaching an 18-month high of 4.01 percent on April 5, touching 3.26 percent on May 6, the lowest level since December. The two-year note yield fell 26 basis points over the past two weeks to 0.81 percent, its biggest drop since January. The 30-year bond yield fell 24 basis points over the past five days, the most in a week since December 2008, to 4.28 percent. The Federal Reserve dropped interest rates to virtually zero that month and said it would buy long-term debt. Increase in Jobs     Treasuries fell yesterday for the first time in four days as a report showed U.S. employment rose the most last month in four years and investors speculated that the European Central Bank would step up efforts to keep Greece’s fiscal crisis from spreading. U.S. employers added 290,000 jobs in April after an increase of 230,000 positions in March that was larger than initially estimated, the Labor Department reported in Washington. The median forecast of 84 economists in a Bloomberg News survey was for a gain of 190,000. Worker productivity increased more than forecast in the first quarter, a Labor report on May 6 showed, rising to a 3.6 percent annual rate. ECB President Jean-Claude Trichet resisted pressure from economists this week to consider buying government bonds to ease the Greek debt crisis. Stocks, raw materials and the euro fell on concern that Europe’s most indebted nations will struggle to avoid default. The Standard & Poor’s 500 Index slid 6.4 percent this week and the MSCI World Index plunged 8.3 percent. Crude oil for June delivery fell as much as 3.4 percent yesterday to $74.51 a barrel in New York, the lowest level since Feb. 12. ‘Monitor the Situation’ Group of Seven nations officials met yesterday by conference call and “agreed to continue to monitor the situation closely,” the U.K. Treasury said. “They can talk until they are blue in the face — the markets are looking for action, and soon,” Kevin Giddis , head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “We in this country have learned exactly what a crisis of confidence can do to a market and the economy.” The rate banks say they pay for three-month loans in dollars rose the most in almost 16 months as lending sputtered amid concern financial institutions are holding too many assets of Europe’s most indebted nations. The London interbank offered rate, or Libor , for three- month loans climbed 5.5 basis points to 0.428 percent yesterday, the highest level since Aug. 17, according to British Bankers’ Association data. It was the biggest rise since Jan. 16, 2009. ‘Uncertainty’ the Enemy “You need to have more of a widespread conviction that this is somehow being resolved, otherwise you’re going to continue to go through this uncertainty, and uncertainty is the enemy of any financial market,” said Kevin Flanagan , a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. Job growth in the U.S. will need to continue for several months along the lines of yesterday’s gain before the Fed considers raising interest rates, according to Pacific Investment Management Co.’s Bill Gross , manager of the world’s biggest mutual fund. “The Fed’s not about to move, in my opinion, until we start to see significant, steady progress in terms of job growth and lower unemployment rates,” Gross said during a Bloomberg Radio interview with Tom Keene . Interest-Rate Bets Futures on the CME Group Inc. exchange yesterday showed a 52 percent chance policy makers will raise the target rate for overnight bank lending by at least a quarter-percentage point by December, compared with 75 percent odds a month ago. The central bank has kept the rate between zero and 0.25 percent since December 2008. The Treasury will auction $78 billion in notes and bonds next week, the first reduction in sales of coupon-bearing securities since May 2007. The department said May 5 it will sell $38 billion in three-year notes on May 11, $24 billion in 10-year debt the next day and $16 billion in 30-year bonds on May 13. The total was less than the $80 billion median forecast in a Bloomberg News survey of the Fed’s 18 primary dealers, which anticipated $39 billion in three-year notes and $25 billion in 10 year securities. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net ; Daniel Kruger in New York at dkruger1@bloomberg.net

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Treasury 10-Year Notes Register the First Monthly Increase Since January

May 1, 2010

By Daniel Kruger and Cordell Eddings May 1 (Bloomberg) — U.S. 10-year notes had their first monthly gain since January as concern the Greek debt crisis will spread fueled demand for the safest government securities even as the U.S. economic recovery showed signs of accelerating. Treasury yields fell yesterday as investors sought to guard against a breakdown in talks between Greece and the European Union and International Monetary Fund on 24 billion euros ($32 billion) in budget cuts. The Labor Department will report on May 7 that the U.S. economy added 190,000 jobs in April, the most since March 2007, according to the median forecast of 58 economists in a Bloomberg News survey. “The U.S. can post good economic numbers and companies can post good earning numbers, but if this thing spirals out in Europe, then we too will feel it,” said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of the 18 primary dealers that trade with the Federal Reserve. “That’s why you’re having Treasuries rally.” The 10-year note yield fell 6 basis points, or 0.06 percentage point, to 3.67 percent yesterday in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2020 rose 17/32, or $5.31 per $1,000 face amount, to 99 21/32. The yield fell 15 basis points in April and reached 3.65 percent yesterday, the lowest level since March 23. The two-year note’s yield dropped 6 basis points last month to 0.96 percent. Treasuries returned 0.7 percent in April as of April 29 after a loss of 0.9 percent in March, according to indexes compiled by Bank of America Merrill Lynch. U.S. Growth Barclays Plc estimated the duration of its U.S. Treasury Index will rise by 0.6 years, the smallest extension this year. The average extensions this year has been 0.9 years. Duration measures price sensitivity to changes in yield, and is partly a function of maturity. U.S. gross domestic product increased at a 3.2 percent annual pace from January through March, the Commerce Department said yesterday. That was less than the 3.3 percent median estimate of 85 economists surveyed by Bloomberg News. “Risk assets in general will find this to be encouraging,” said Keith Blackwell, an interest-rate strategist at primary dealer Royal Bank of Canada in New York. “That’s going to put upward pressure on yields.” The inflation gauge used by the Fed that’s tied to consumer spending and strips out food and fuel costs climbed at a 0.6 percent annual rate in the first quarter, higher than the 0.5 percent median forecast in a separate Bloomberg survey. Reversing Gains “A few weeks ago you were pushing against the high end of that range and got rejected pretty firmly,” said Bill Bemis, a portfolio manager who helps oversee $40 billion in U.S. fixed income assets at Aviva Investors in Des Moines, Iowa, a unit of London-based insurer Aviva plc. “Now we believe you’re pushing against the bottom of it, and expect it to hold. We expect rates to be moving higher, and are positioned accordingly.” The 10-year note yield will rise to 3.82 percent at the end of the quarter, according to a weighted average in a Bloomberg survey of 69 forecasters. The two-year note yield will climb to 1.15 percent by the end of June, according to a separate Bloomberg survey. Futures on the CME Group Inc. exchange showed a 64 percent chance yesterday that the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by December, compared with 63 percent odds a week earlier. The central bank has kept the rate between zero and 0.25 percent since December 2008. Greek Crisis Bonds and stocks in Europe’s most indebted nations fell in the past week as Greece’s budget turmoil forced the country to seek a bailout from the European Union and the International Monetary Fund, and Standard & Poor’s downgraded Greece, Portugal and Spain. The euro fell to a one-year low on April 28. “The big news is what’s going on overseas,” said Theodore Ake , head of Treasury trading at Societe General in New York. “That’s going to be a bigger story, we just have to see what the timing is on it.” U.S. note sales this week totaled record $129 billion as President Barack Obama borrows unprecedented amounts to sustain economic growth. The central bank’s pledge to keep borrowing rates near zero for an “extended period” is raising concern the stance will make it harder for the policy-setting Federal Open Market Committee to keep prices in check as the economy expands. The Fed reiterated the promise after a meeting April 28, and Kansas City Fed President Thomas Hoenig dissented for a third straight time. Hoenig said “it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the committee’s flexibility to begin raising rates,” according to the FOMC statement. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 2.40 percentage points. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net ; Cordell Eddings in New York at ceddings@bloomberg.net

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Treasuries Gain Second Week on Inflation Data, Increase in Jobless Claims

April 17, 2010

By Cordell Eddings and Daniel Kruger April 17 (Bloomberg) — Treasuries gained for a second week as reports that showed consumer prices excluding food and fuel were unchanged and jobless claims unexpectedly rose spurred speculation the Federal Reserve will keep rates low. Two-year note yields dropped below 1 percent for the first time in almost a month yesterday as the Securities and Exchange Commission sued Goldman Sachs Group Inc. for fraud and an index of U.S. consumer sentiment unexpectedly declined. Producer prices rose 0.5 percent in March, according to the median estimate in a Bloomberg News survey before a report next week. “Good inflation data is signaling to the Fed that there’s no hurry to raise rates,” said David Brownlee , head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $22 billion. “Bonds seem to me to be cheap.” The 10-year note yield fell 11 basis points on the week, or 0.11 percentage point, to 3.76 percent, according to BGCantor Market Data. The yield on April 5 rose above 4 percent for the first time since June. The 3.625 percent security maturing in February 2020 gained 29/32, or $9.06 per $1,000 face amount, to 98 27/32. Shares of Goldman Sachs slid as much as 16 percent yesterday after it was sued by regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. ‘Completely Unfounded’ “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman Sachs said in a statement. Consumer prices rose 0.1 percent in March, in line with forecasts, while the core rate held steady, reflecting cheaper rents and clothing. U.S. debt rose yesterday as confidence among U.S. consumers unexpectedly fell to the lowest level in five months. The Reuters/University of Michigan preliminary April consumer sentiment index fell to 69.5 from 73.6 in the previous month. The data followed a report on April 14 that showed retail sales rose 1.6 percent in March, the biggest gain in four months. “The surprising number was consumer confidence as it doesn’t jibe with the recent uptick in retail sales,” said Kevin Flanagan , a Purchase, New York-based chief fixed income strategist at Morgan Stanley Smith Barney. “The theme for this week has been establishing the new range for the 10-year note. We tested four percent and established it as a new top.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, narrowed to 2.34 percentage points, from this year’s high of 2.49 percentage points in January. The five-year average is 2.15 percentage points. ‘Bullish on Treasuries’ “We remain bullish on Treasuries and favor expressing this in the front end,” analysts at BNP Paribas SA wrote in a report on April 15. “The downside surprise in core CPI this week, along with stable inflation expectations and relatively contained TIPS breakevens, all should lead the market to expect the Fed to remain on the sidelines for the foreseeable future.” Central bank officials indicated the recovery won’t generate enough jobs or inflation to change a pledge to keep interest rates low when they meet this month. Fed Chairman Ben S. Bernanke told Congress on April 14 that high unemployment and weak construction are among the “significant restraints” on the pace of growth. He repeated the Fed’s view that borrowing costs are likely to stay low for an “extended period” as the economy contends with weak construction spending and high unemployment. Hawkish Comments’ “Don’t be misled by occasional hawkish comments,” John Richards and Jim Lee , strategists at Royal Bank of Scotland Group Plc in Stamford, Connecticut, wrote in a note to clients on April 15. The firm is one of 18 primary dealers that trade with the Fed. “With inflation quiescent and Bernanke reiterating the ‘extended period’ language yesterday, the lower- longer group at the Fed is in firm control.” Declining confidence threatens to restrain household spending, which accounts for about 70 percent of the economy. While recent figures showed retail sales picked up in March, a 9.7 percent unemployment rate and mounting home foreclosures are risks for the recovery. “There is concern that the recent optimism in consumer spending is unsustainable without clear improvement in the unemployment rate,” said Christian Cooper , an interest-rate strategist at primary dealer Royal Bank of Canada in New York. Initial jobless claims jumped by 24,000 to 484,000 in the week ended April 10, the Labor Department reported on April 15. Economists forecast claims would fall to 440,000, according to the survey median. ‘Remains a Worry’ “The growth data is looking better but it remains a worry that jobless claims have not fallen to a level that is consistent with job growth,” said Carl Lantz , head of interest- rate strategy at Credit Suisse AG in New York, another primary dealer. “The labor market is not clicking on all cylinders. We are still a long way from there.” Treasuries also gained as European Union finance ministers yesterday told Greece to brace itself for the International Monetary Fund’s conditions for granting a bailout package for the debt-strapped nation. The yield premium investors demand to hold Greek 10-year bonds instead of benchmark German bunds rose for a fourth day. “The endless Greece saga is just not going away,” said Ward McCarthy , chief financial economist at primary dealer Jefferies & Co. Inc. in New York. “Greece sort of provides a failsafe bid under Treasuries.” Hedge-fund managers and other large speculators increased bets in the futures market in the week ended April 13 that 10- year notes will decline, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 274,741 contracts on the Chicago Board of Trade. So-called net-short positions rose by 30,008 contracts, or 12 percent, from a week earlier, the Washington- based commission said in its Commitments of Traders report. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net ; Daniel Kruger in New York at dkruger1@bloomberg.net

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Rise in Treasury Yields Slowed as Currency Reserves Grow Fastest Since ’08

April 5, 2010

By Daniel Kruger and Matthew Brown

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Rise in Treasury Yields Slowed as Currency Reserves Grow Fastest Since ’08

April 5, 2010

By Daniel Kruger and Matthew Brown

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Japan May Not Have Surpassed China as Largest U.S. Debt Holder, SMR Says

February 18, 2010

By Daniel Kruger Feb. 18 (Bloomberg) — The Treasury’s methodology for calculating the holdings of overseas investors leaves room to question whether Japan has overtaken China as the biggest lender to the U.S., according to Stone & McCarthy Research Associates. Japan became the biggest holder of U.S. government securities in December for the first time since September 2008, overtaking China which had held the largest position of the debt, Treasury data released Feb. 16 show. The Treasury has underestimated changes in the holdings of both China and Japan for 2006, 2007 and 2008, raising the question of whether the data reflects a shift in support for U.S. government debt as the Obama administration raises record sums amid the biggest budget deficits in the country’s history, Nancy Vanden Houten , a Skillman, New Jersey-based analyst at Stone & McCarthy, wrote in a note to clients on Feb. 16. “The further we get away from the June survey date, the rougher the proxy for actual Treasury’s monthly estimates become,” Vanden Houten wrote. “Japan may in fact have held more Treasury securities than China at the end of 2009. But it’s impossible to make that claim with a high degree of confidence.” The Treasury data on note and bond positions uses holdings recorded in an annual June survey which are adjusted by adding monthly trading information. To be included by the Treasury, one counterparty must be in the U.S., with ownership attributed to the nation where the other counterparty is located, Vanden Houten wrote. Underestimated Purchases Using that data, the Treasury underestimated China’s accumulation of Treasuries by 104 percent in 2006, 237 percent in 2007 and 130 percent in 2008, Vander Houten wrote. The data also underestimated the decline in Japan’s holdings by 132 percent in 2006, she said. It undercounted the rise in the country’s Treasury position by 127 percent in 2007 and showed a decline in the holdings for 2008 that was more than twice the size of the increase in the purchase of the securities, she wrote. Japan’s holdings rose 1.5 percent in December to $768.8 billion while China’s dropped 4.3 percent to $755.4 billion, the latest Treasury data showed. China allowed its short-term Treasury bills to mature and replaced them with a smaller amount of longer-term notes and bonds, according to the data. For all of 2009, Japan raised its ownership by 23 percent while China’s increased by 3.8 percent. China, with the world’s largest central bank reserves, may be moving money to other investments from the relative safety of Treasuries as the U.S. runs record budget deficits, economists said. China’s Treasury holdings peaked at $801.5 billion in May, and net sales in November and December were the first consecutive months of reductions since late 2007. Budget Gap China had been the largest creditor abroad to the U.S. since September 2008, when its holdings of Treasuries surpassed those of Japan. China’s holdings of Treasury bills have shrunk to $69.7 billion, about a third of the $210.4 billion held in May, as the outlook for a recovery in the U.S. remained unclear. Chinese officials have over the past year expressed concern about an increase in U.S. debt to fund the swelling fiscal deficit. Premier Wen Jiabao said in March 2009 he was “worried” about China’s Treasury holdings and wanted assurances that the nation’s U.S. investments were safe, and central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar. Treasury Secretary Timothy Geithner has sought to assure China that the U.S. will close the budget gap and boost national savings over time. Dalai Lama Tension between the U.S. and China has risen in the past few months over censorship of Google Inc., climate change and arms sales to Taiwan. President Barack Obama met the Dalai Lama , the exiled Tibetan spiritual leader, in Washington today even after China called on the U.S. to cancel the gathering. Tibet has been under Chinese control since 1950. Total foreign holdings of Treasuries rose 17 percent in 2009 to $3.61 trillion as outstanding Treasury debt increased 25 percent to $7.27 trillion, according to Treasury data. Half of U.S. debt is held by foreign investors, down from a peak of 55.7 percent in April 2008. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net ;

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Treasuries Are Little Changed After $32 Billion Sale of Seven-Year Notes

December 30, 2009

By Daniel Kruger Dec. 30 (Bloomberg) — Treasuries were little changed after the government sold $32 billion of seven-year debt, the last of three note sales this week totaling a record-tying $118 billion. The securities drew a yield of 3.345 percent, compared with an average forecast of 3.372 percent in a Bloomberg News survey of four of the Federal Reserve’s 18 primary dealers. The bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.72. The average ratio at the last 10 auctions was 2.56. “The back-up in yields makes them moderately more attractive,” Christian Cooper , an interest-rate strategist at Royal Bank of Canada’s RBC Capital Markets in New York, said before the auction. The firm is one of 18 primary dealers that trade with the Federal Reserve and are obligated to bid in Treasury auctions. “It feels like that is the tone.” The yield on the current seven-year note fell one basis point, or 0.01 percentage point, to 3.30 percent at 1:03 p.m. in New York, according to BGCantor Market Data. The last auction of seven-year debt, a $32 billion offering in November, drew a yield of 2.835 percent, the lowest since April. The bid -to-cover ratio was 2.76. Indirect bidders, a class of investors that includes foreign central banks, purchased 44.7 percent of the notes today. At the November sale, they bought 62.5 percent, compared with an average for the past 10 sales of 50.7 percent. Treasuries earlier were little changed. They have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades. Unprecedented Amounts President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. The U.S. sold $42 billion of five-year securities yesterday and $44 billion in two-year notes on Dec. 28. Today’s auction was “the last hoop the market has to jump through in 2009,” said James Collins , an interest-rate strategist in the futures group in Chicago at Citigroup Inc., one of 18 primary dealers that trade with the Fed and are obliged to participate in Treasury auctions. “Yields have been trending higher. It’s been a response to increased supply.” Holders of U.S. debt have made a return of 81 percent over the past decade, according to the Bank of America Merrill Lynch indexes. That compares with an 8 percent loss for the Standard & Poor’s 500 Total Return Index . Yield Curve The so-called Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record earlier this month as investors bet an accelerating recovery will fuel inflation and hurt demand for the unprecedented sales of government debt. The gap between U.S. 2- and 10-year yields widened to a record 2.88 percentage points on Dec. 22, from 1.45 percentage points at the beginning of the year. The spread was at 2.72 percentage points today. Companies in the U.S. expanded more than anticipated in December as orders and employment grew, a report today by the Institute for Supply Management-Chicago Inc. showed. The group’s business barometer rose to 60, more than forecast in a Bloomberg News survey and the highest level since January 2006. Readings above 50 signal expansion. Bernanke’s Outlook An index of home prices in 20 U.S. cities rose in October for a fifth consecutive month, the S&P/Case-Shiller home-price index showed yesterday. Confidence among U.S. consumers increased in December for a second month, the New York-based Conference Board’s consumer confidence index showed yesterday. Fed Chairman Ben S. Bernanke has cited a tame inflation outlook as a reason for keeping the target interest rate for overnight loans between banks at a record low zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines. The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.43 percentage points yesterday, the widest since July 2008. It was 2.41 percentage points today. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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Bernanke TIPS Give Way to Inflation as Deflation-Adjusted Yields Diminish

December 20, 2009

By Daniel Kruger Dec. 21 (Bloomberg) — The market for Treasury inflation protected securities is showing Federal Reserve Chairman Ben S. Bernanke won the battle with deflation, paving the way to start withdrawing cash pumped into the economy since 2007. The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz , head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut. Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week. “It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said Carl Lantz , an interest-rate strategist in New York at Credit Suisse Securities Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed. Rising Yields The yield on the benchmark 3.375 percent note due November 2019 ended last week at 3.54 percent, as the price rose 2/32, or 63 cents per $1,000 face amount, to 98 21/32. Treasuries are poised for their first down year in a decade, losing 2.43 percent after reinvested interest, according to Merrill Lynch & Co.’s U.S. Treasury Master index. They gained 14 percent on average in 2008 as the global recession deepened and investors bet on deflation, or a general decline in prices. While prices fell, real yields, which takes into account inflation or deflation, widened to an average of 3.64 percent this year, the most since 1998, helping attract investors to the record $1.48 trillion in new cash raised by the government in the bond market in 2009. TIPS returned 11.1 percent this year as measured by Merrill Lynch indexes, on speculation that the almost $12 trillion lent, spent or committed by the government and Fed to keep financial markets from collapsing would spark inflation. ‘Deflation Fighter’ “The TIPS breakevens moving higher is a sign Bernanke is gaining credibility as a deflation fighter,” said Robert Tipp , chief investment strategist for fixed income at Prudential Investment Management. The Newark, New Jersey-based firm oversees more than $200 billion in bonds. The securities pay interest on a principal amount that rises or falls based on the consumer price index. Inflation- protected bonds due in 10 years yield 2.29 percentage points less than Treasuries. That gap, known as the break-even rate, has risen from 0.04 percent in November 2008. It averaged about 2.42 percentage points in the five year’s before Lehman went bankrupt. “A lot of people are investing in the asset class viewing that with the amount of liquidity that the Fed has provided the market and the devaluation of the dollar that inflation’s inevitable somewhere down the road,” said Todd White , who oversees government debt trading at Minneapolis-based RiverSource Investments, which manages $93 billion of bonds. The breakeven rate could widen to 2.75 percentage points, he said. Fed Statement The last time the difference was that wide was May 2006, when the Fed’s target rate was 5 percent. After their meeting in Washington on Dec. 16, Fed policy makers said in a statement that keeping borrowing costs low is contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” That day, the Labor Department said its consumer price index rose 0.4 percent in November, matching the second biggest gain of the past year. The day before, the government said wholesale prices surged 1.8 percent, more than twice the 0.8 percent median forecast of economists surveyed by Bloomberg. With market functions improving, the central bank also said that most of its special liquidity facilities will expire on Feb. 1, including programs to backstop money-market mutual funds and commercial paper. The Fed said it’s working with other central banks to close temporary liquidity swap arrangements by then. ‘Unmoored’ Expectations Prices of federal-funds futures contracts on the Chicago Board of Trade show a 42 percent chance policy makers will lift rates by mid-2010, up from 34 percent a month ago. The median estimate of 63 economists and strategists surveyed by Bloomberg is for 10-year yields to rise to 3.68 percent in the same period. “What could get them to move is if inflation expectations become unmoored,” said Michael Pond , an interest-rate strategist in New York at Barclays Plc, the largest trader of U.S. inflation-linked debt and a primary dealer. With the unemployment rate at 10 percent, TIPS breakeven rates may be overstating the potential for rising consumer prices, according to Ken Volpert , a money manager at Valley Forge, Pennsylvania-based Vanguard Group Inc. “We’re going to have inflation that in the next year is below what’s implied in the breakevens,” said Volpert, who oversees $180 billion in taxable bonds. Fed Forecast The Fed’s long-term forecast for its preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, is 1.8 percent to 2 percent. That gauge, which is typically lower than the CPI, was up 1.4 percent in the 12 months to October. Deflation can menace an economy just as much as inflation because it discourages investment and spending. Japan’s economy has been in and out of recession since the mid-1990s, largely because of falling consumer prices. San Ramon, California-based Chevron Corp. , the second- largest U.S. energy producer, said Dec. 10 that it cut its 2010 capital plan by 5 percent. Capacity utilization , which measures the proportion of plants in use, was 71.3 percent last month, down from 80.5 percent at the start of 2008, the Fed said last week. Other parts of the bond market are signaling that prices will increase. The Fed’s five-year/five-year forward breakeven rate rose to 3.13 percentage points last week from 2.04 percentage points a year ago. The rate plots forward rates measuring investor expectations for inflation in five years. Pre-Crisis High The gauge is approaching the pre-financial crisis high of 3.36 percent in May 2004, a month before the central bank began a series of 17-consecutive rate increases that brought its target to 5.25 percent in June 2006 from 1 percent. What’s changed from last year is that commodities are on the rise. Oil fell as low as $32.40 a barrel a year ago as the economy contracted. It rebounded to as high as $82 in October, before ending last week at $74. Gold has risen 39 percent to a record $1,226.40 an ounce on Dec. 3. “Over the course of the year we’ve pretty much moved back to the historical range in five-year/five-year,” said Credit Suisse’s Lantz. “We are testing the upper end of that range and I think that’s associated with concerns about the long-term inflation outlook, given the Fed’s very accommodative policy stance.” To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net .

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Bernanke TIPS Give Way to Inflation as Deflation-Adjusted Yields Diminish

December 20, 2009

By Daniel Kruger Dec. 21 (Bloomberg) — The market for Treasury inflation protected securities is showing Federal Reserve Chairman Ben S. Bernanke won the battle with deflation, paving the way to start withdrawing cash pumped into the economy since 2007. The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz , head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut. Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week. “It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said Carl Lantz , an interest-rate strategist in New York at Credit Suisse Securities Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed. Rising Yields The yield on the benchmark 3.375 percent note due November 2019 ended last week at 3.54 percent, as the price rose 2/32, or 63 cents per $1,000 face amount, to 98 21/32. Treasuries are poised for their first down year in a decade, losing 2.43 percent after reinvested interest, according to Merrill Lynch & Co.’s U.S. Treasury Master index. They gained 14 percent on average in 2008 as the global recession deepened and investors bet on deflation, or a general decline in prices. While prices fell, real yields, which takes into account inflation or deflation, widened to an average of 3.64 percent this year, the most since 1998, helping attract investors to the record $1.48 trillion in new cash raised by the government in the bond market in 2009. TIPS returned 11.1 percent this year as measured by Merrill Lynch indexes, on speculation that the almost $12 trillion lent, spent or committed by the government and Fed to keep financial markets from collapsing would spark inflation. ‘Deflation Fighter’ “The TIPS breakevens moving higher is a sign Bernanke is gaining credibility as a deflation fighter,” said Robert Tipp , chief investment strategist for fixed income at Prudential Investment Management. The Newark, New Jersey-based firm oversees more than $200 billion in bonds. The securities pay interest on a principal amount that rises or falls based on the consumer price index. Inflation- protected bonds due in 10 years yield 2.29 percentage points less than Treasuries. That gap, known as the break-even rate, has risen from 0.04 percent in November 2008. It averaged about 2.42 percentage points in the five year’s before Lehman went bankrupt. “A lot of people are investing in the asset class viewing that with the amount of liquidity that the Fed has provided the market and the devaluation of the dollar that inflation’s inevitable somewhere down the road,” said Todd White , who oversees government debt trading at Minneapolis-based RiverSource Investments, which manages $93 billion of bonds. The breakeven rate could widen to 2.75 percentage points, he said. Fed Statement The last time the difference was that wide was May 2006, when the Fed’s target rate was 5 percent. After their meeting in Washington on Dec. 16, Fed policy makers said in a statement that keeping borrowing costs low is contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” That day, the Labor Department said its consumer price index rose 0.4 percent in November, matching the second biggest gain of the past year. The day before, the government said wholesale prices surged 1.8 percent, more than twice the 0.8 percent median forecast of economists surveyed by Bloomberg. With market functions improving, the central bank also said that most of its special liquidity facilities will expire on Feb. 1, including programs to backstop money-market mutual funds and commercial paper. The Fed said it’s working with other central banks to close temporary liquidity swap arrangements by then. ‘Unmoored’ Expectations Prices of federal-funds futures contracts on the Chicago Board of Trade show a 42 percent chance policy makers will lift rates by mid-2010, up from 34 percent a month ago. The median estimate of 63 economists and strategists surveyed by Bloomberg is for 10-year yields to rise to 3.68 percent in the same period. “What could get them to move is if inflation expectations become unmoored,” said Michael Pond , an interest-rate strategist in New York at Barclays Plc, the largest trader of U.S. inflation-linked debt and a primary dealer. With the unemployment rate at 10 percent, TIPS breakeven rates may be overstating the potential for rising consumer prices, according to Ken Volpert , a money manager at Valley Forge, Pennsylvania-based Vanguard Group Inc. “We’re going to have inflation that in the next year is below what’s implied in the breakevens,” said Volpert, who oversees $180 billion in taxable bonds. Fed Forecast The Fed’s long-term forecast for its preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, is 1.8 percent to 2 percent. That gauge, which is typically lower than the CPI, was up 1.4 percent in the 12 months to October. Deflation can menace an economy just as much as inflation because it discourages investment and spending. Japan’s economy has been in and out of recession since the mid-1990s, largely because of falling consumer prices. San Ramon, California-based Chevron Corp. , the second- largest U.S. energy producer, said Dec. 10 that it cut its 2010 capital plan by 5 percent. Capacity utilization , which measures the proportion of plants in use, was 71.3 percent last month, down from 80.5 percent at the start of 2008, the Fed said last week. Other parts of the bond market are signaling that prices will increase. The Fed’s five-year/five-year forward breakeven rate rose to 3.13 percentage points last week from 2.04 percentage points a year ago. The rate plots forward rates measuring investor expectations for inflation in five years. Pre-Crisis High The gauge is approaching the pre-financial crisis high of 3.36 percent in May 2004, a month before the central bank began a series of 17-consecutive rate increases that brought its target to 5.25 percent in June 2006 from 1 percent. What’s changed from last year is that commodities are on the rise. Oil fell as low as $32.40 a barrel a year ago as the economy contracted. It rebounded to as high as $82 in October, before ending last week at $74. Gold has risen 39 percent to a record $1,226.40 an ounce on Dec. 3. “Over the course of the year we’ve pretty much moved back to the historical range in five-year/five-year,” said Credit Suisse’s Lantz. “We are testing the upper end of that range and I think that’s associated with concerns about the long-term inflation outlook, given the Fed’s very accommodative policy stance.” To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net .

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Two-Year Treasuries Extend Rally Fifth Week on View Fed Rates Stay on Hold

November 28, 2009

By Daniel Kruger and Susanne Walker Nov. 28 (Bloomberg) — Treasury two-year notes advanced for a fifth week, the yield touching the lowest level in 11 months, on speculation the Federal Reserve will continue to hold interest rates near zero well into 2010. Two- and 10-year Treasuries yesterday posted their biggest gains this month after Dubai’s proposal to delay debt payments sparked a global slide in stocks and higher-yielding assets. The U.S. sold $118 billion in 2-, 5- and 7-year debt. The jobless rate held at a 26-year high of 10.2 percent in November, a Labor Department report is forecast to show on Dec. 4. “There continues to be incredible demand for Treasuries,” said Jeffry Feigenwinter , head of Treasury trading in New York at BNP Paribas Securities, one of the 18 primary dealers that trade with the Fed. “It’s incredible to be able to take down the supply at these levels. The data for the last couple of months have gotten a little bit better, but nobody believes in the sustainability of the recovery.” The yield on the benchmark two-year note fell four basis points on the week to 0.68 percent, according to BGCantor Market Data. It yesterday touched 0.61 percent, the lowest level since Dec. 17. The debt’s five weeks of gains matches the longest rally so far in 2009. Ten-year notes rose for a third consecutive week. The yield fell 17 basis points to 3.20 percent, the biggest weekly decline since the five days ended Aug. 14. The U.S. economy expanded at an annual rate of 2.8 percent in the third quarter, the Commerce Department reported on Nov. 24, compared with its prior estimate of 3.5 percent, as consumer spending, which makes up 70 percent of the economy, trailed forecasts. Auction Demand The U.S. economy shed 120,000 jobs in November, according to the median estimate of 67 analysts surveyed by Bloomberg News before next week’s report. Treasuries gained this week as the Fed, under Chairman Ben S. Bernanke , indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline. “Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” according to minutes of the Fed’s November meeting released Nov. 24. The central bank’s outlook drove strong demand at each of this week’s three note offerings. The ratio of bids to debt sold at the $42 billion sale of five-year notes on Nov. 24 was the highest since September 2007. The $44 billion of two-year notes auctioned on Nov. 23 drew a yield of 0.802 percent, the lowest on record. Dubai Debt ‘Standstill’ A $32 billion sale of seven-year notes on Nov. 25 drew a yield of 2.835 percent, below the 2.878 percent forecast in a Bloomberg News survey. The Treasury sold $1.917 trillion of notes and bonds through the first 11 months of 2009, compared with $827 billion during the same period last year. “Even given the good tone of the market, the results were stronger than the market in general had expected,” said Richard Bryant , senior vice president in fixed income at MF Global Inc. in New York, a broker of exchange-traded futures. Dubai World, the government investment company burdened by $59 billion of liabilities, will ask all creditors for a “standstill” agreement as it negotiates to extend debt maturities, Dubai’s Department of Finance said on Nov. 25 in an e-mailed statement. Japan’s currency appreciated to as much as 84.83 per dollar yesterday, the strongest since July 1995, increasing concern the nation’s monetary authorities will intervene to curb further appreciation of the currency. “People are scared and concerned about possible intervention,” said Yasutoshi Nagai , chief economist at Daiwa Securities SMBC Co. in Tokyo. The BOJ may sell the yen “and buy Treasuries, which will be a plus for Treasuries.” Yield Curve Japan last intervened on March 16, 2004, when the central bank sold the yen. Finance Minister Hirohisa Fujii said on Nov. 26 the government needs to take action on “abnormal” currency movements, and Prime Minister Yukio Hatoyama said the same day the yen’s appreciation was due to weakness in the dollar. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 2.11 percentage points from 2.19 percentage points last week. Treasuries of all maturities have gained 1 percent so far this month, according to indexes compiled by Merrill Lynch & Co. The securities have handed investors a loss of 1.5 percent in 2009, headed for the first decline since 1999 as President Barack Obama borrows record amounts to fund spending programs and service deficits. U.S. marketable debt totaled $6.95 trillion in October, after reaching a record $7.01 trillion in September. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net ; Susanne Walker in New York at swalker33@bloomberg.net .

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Treasury Sells $44 Billion of Two-Year Government Debt at Record Low Yield

November 23, 2009

By Daniel Kruger Nov. 23 (Bloomberg) — The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end. Investors are piling into short-term Treasuries on concern that this year’s rally in risk assets has outpaced growth prospects and as Federal Reserve officials signaled interest rates will remain near zero for an extended period. Rates on some Treasury bills turned negative last week for the first time since last December, when global credit markets froze. “It just points to ongoing yield grab at the front-end,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Group AG, one of 18 primary dealers that trade with the Fed. “People are being pushed further out the money market curve when you have bills at the front-end trading at zero or negative.” The yield on the current two-year note rose one basis point, or 0.01 percentage point, to 0.74 percent at 2:06 p.m. in New York, according to BGCantor Market Data. The 1 percent security maturing in October 2011 fell less than 1/32 to 100 16/32. The previous low for the so-called high yield was 0.922 percent on the auction held. Dec. 26, 2008. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.16, compared with 3.63 at the previous auction. The average at the last 10 auctions was 2.92. ‘Option to React’ The last auction, a $44 billion offering on Oct. 27, drew a yield of 1.02 percent. Indirect bidders , a class of investors that includes foreign central banks, purchased 44.5 percent of the notes today, the same as at the October sale. The average for the past 10 sales was 44 percent. The size of today’s two-year offering matched the record set last month. The Treasury is scheduled to sell $42 billion of five-year securities tomorrow and $32 billion of debt maturing in seven years on Nov. 25, both record amounts. Fed Bank of St. Louis President James Bullard said yesterday the central bank should retain the flexibility to respond to any weakening in the economy by extending beyond March its authority to buy mortgage-backed securities and agency bonds. “I would just like to keep them active at a very low level instead of saying we’re shutting down, shutting down permanently,” Bullard told reporters after a speech in New York. “Initially it would do nothing for the economy, but it would give the Fed the option to react to future news as it comes in.” Negative Rates The Fed said on Nov. 4 that it will purchase a total of $1.25 trillion of agency mortgage-backed securities through the first quarter of next year. It reiterated that interest rates will stay at almost zero for “an extended period.” For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate — a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938. That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. In 1939 stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized. Great Depression Buff While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved. Stock investors, meanwhile, say the worst is over and that low borrowing costs coupled with the $12 trillion of fiscal and monetary stimulus will bolster earnings . The three-month bill rate rose two basis points, or 0.02 percentage point, to 0.023 percent, according to Bloomberg data. Three-month bill rates turned negative on Nov. 19 for the first time since last year’s credit freeze. The Treasury also sold $31 billion of six-month notes today at a yield of 0.14 percent and $30 billion of three-month notes at a yield of 0.04 percent, the lowest since Dec. 22, 2008, a week after the Fed lowered its target rate for overnight loans between banks to a range of zero to 0.25 percent. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net .

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Treasury Sells $44 Billion of Two-Year Government Debt at Record Low Yield

November 23, 2009

By Daniel Kruger Nov. 23 (Bloomberg) — The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end. Investors are piling into short-term Treasuries on concern that this year’s rally in risk assets has outpaced growth prospects and as Federal Reserve officials signaled interest rates will remain near zero for an extended period. Rates on some Treasury bills turned negative last week for the first time since last December, when global credit markets froze. “It just points to ongoing yield grab at the front-end,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Group AG, one of 18 primary dealers that trade with the Fed. “People are being pushed further out the money market curve when you have bills at the front-end trading at zero or negative.” The yield on the current two-year note rose one basis point, or 0.01 percentage point, to 0.74 percent at 2:06 p.m. in New York, according to BGCantor Market Data. The 1 percent security maturing in October 2011 fell less than 1/32 to 100 16/32. The previous low for the so-called high yield was 0.922 percent on the auction held. Dec. 26, 2008. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.16, compared with 3.63 at the previous auction. The average at the last 10 auctions was 2.92. ‘Option to React’ The last auction, a $44 billion offering on Oct. 27, drew a yield of 1.02 percent. Indirect bidders , a class of investors that includes foreign central banks, purchased 44.5 percent of the notes today, the same as at the October sale. The average for the past 10 sales was 44 percent. The size of today’s two-year offering matched the record set last month. The Treasury is scheduled to sell $42 billion of five-year securities tomorrow and $32 billion of debt maturing in seven years on Nov. 25, both record amounts. Fed Bank of St. Louis President James Bullard said yesterday the central bank should retain the flexibility to respond to any weakening in the economy by extending beyond March its authority to buy mortgage-backed securities and agency bonds. “I would just like to keep them active at a very low level instead of saying we’re shutting down, shutting down permanently,” Bullard told reporters after a speech in New York. “Initially it would do nothing for the economy, but it would give the Fed the option to react to future news as it comes in.” Negative Rates The Fed said on Nov. 4 that it will purchase a total of $1.25 trillion of agency mortgage-backed securities through the first quarter of next year. It reiterated that interest rates will stay at almost zero for “an extended period.” For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate — a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938. That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. In 1939 stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized. Great Depression Buff While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved. Stock investors, meanwhile, say the worst is over and that low borrowing costs coupled with the $12 trillion of fiscal and monetary stimulus will bolster earnings . The three-month bill rate rose two basis points, or 0.02 percentage point, to 0.023 percent, according to Bloomberg data. Three-month bill rates turned negative on Nov. 19 for the first time since last year’s credit freeze. The Treasury also sold $31 billion of six-month notes today at a yield of 0.14 percent and $30 billion of three-month notes at a yield of 0.04 percent, the lowest since Dec. 22, 2008, a week after the Fed lowered its target rate for overnight loans between banks to a range of zero to 0.25 percent. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net .

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Treasury Yield Curve Steepens Amid Debt Actions, Fed Interest Rate Outlook

November 14, 2009

By Daniel Kruger Nov. 14 (Bloomberg) — The yield gap between Treasury 2- year notes and 30-year bonds reached the widest since July as the U.S. sold $81 billion in notes and bonds amid speculation the Federal Reserve will keep interest rates near record lows. U.S. debt rose as confidence among U.S. consumers unexpectedly dropped in November. The U.S. budget deficit widened in October, reaching a record for that month. The U.S. is scheduled to announce on Nov. 19 how much it plans to raise in 2-, 5- and 7-year note sales the week of Nov. 23. A Commerce Department report Nov. 16 may show retail sales rose last month. “There have been concerns about long-term fiscal deficits leading to more bond issuance in the long end,” said Alex Li , an interest-rate strategist in New York at Credit Suisse AG, one of 18 primary dealers that trade with the Fed. The 10-year note yield fell eight basis points on the week to 3.45 percent, according to BGCantor Market data. The 3.375 percent security due in November 2019 rose 18/32, or $5.63 per $1,000 face amount, to 99 19/32 from its closing price after the U.S. sold a record $25 billion of the debt on Nov. 10. The two-year note yield reached 0.80 percent, the lowest level since April, and declined four basis points on the week. The difference between 2- and 30-year yields reached 3.59 percentage points on Nov. 12, the most since July, up from 1.91 percentage points at the end of 2008. The Fed began lifting borrowing costs 16 months after the spread reached a top at 3.68 percentage points in 1992 and 11 months after it reached 3.63 percentage points in 2003. ‘Modest’ Recovery Gains in the two-year note may have peaked, according to strategists CRT Capital Group LLC. “The two-year has hit the wall” at a 0.80 percent yield, said David Ader , head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We have a high degree of confidence the Fed is not hiking for the next six to nine months. The best of the good news is priced in.” The Fed cut its target for overnight lending between banks to a range of zero to 0.25 percent in December to combat the steepest U.S. economic recession since the 1930s. Chicago Fed Bank President Charles Evans said yesterday recovery will probably be “modest.” “Policy is likely to continue to be appropriate for 2010 and most likely beyond,” Evans told reporters after a speech in Paris. “Unless there are unusual developments, I think the policy is going to be highly accommodative, as it is now, for quite some period of time.” The U.S. sold $40 billion in three-year notes on Nov. 9, $25 billion of 10-year debt on Nov. 10 and $16 billion of 30- year bonds Nov. 12. All amounts were records, as Treasury Secretary Timothy Geithner seeks to lock in near-record-low borrowing costs by lengthening the average due date of the Treasury’s borrowings. ‘No End’ in Sight “Despite the larger issues we’re finding willing buyers,” said Thomas Roth , head of U.S. government bond trading in New York at Dresdner Kleinwort. “From now until the end of the year the bids will be there.” Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20. The amounts make some investors say the week’s gains won’t continue. “There’s no end to the Treasury sales in sight,” Tsutomu Komiya , an investor in Tokyo at Daiwa Asset Management Co., which oversees $77 billion as part of Japan’s second-largest brokerage, said on Nov. 12. “Supply will send bond yields higher.” Ten-year yields will rise to 4 percent by the end of 2010, he said. A Bloomberg survey of banks and securities companies projects the figure will be 4.23 percent, with the most recent forecasts given the heaviest weightings. Additional Measures U.S. marketable debt stands at $6.95 trillion after reaching a record $7.01 trillion in September as President Barack Obama borrows unprecedented amounts to fund spending programs. The U.S. budget deficit widened to $176.4 billion last month, compared with a deficit of $155.5 billion in the same month a year earlier, the Treasury said on Nov. 12. It was a record 13th consecutive shortfall and the fifth-largest monthly gap on record, the department said. Obama said Nov. 12 he needs to consider additional measures to spur job creation and will convene business leaders, financial experts and “representatives from labor unions and nonprofit groups” for a forum next month at the White House. The unemployment rate in the U.S. reached 10.2 percent in October, the highest level since 1983, a Labor Department report showed last week. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 66 from 70.6 last month. Retail sales increased 0.9 percent in October, according to the median estimate of economists in a Bloomberg survey, after declining 1.5 percent the previous month. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net .

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U.S. Treasury Two-Year Notes Gain as Unemployment Rate Tops 10% in October

November 7, 2009

By Daniel Kruger Nov. 7 (Bloomberg) — Treasury two-year note yields touched the lowest since May after the U.S. unemployment rate rose to a 26-year high of 10.2 percent and the Federal Reserve said it will keep rates at record lows for an “extended period.” The difference between yields on 2-year notes and 10-year securities reached 2.70 percentage points, the most since July, before the U.S. sells $81 billion of 3- and 10-year notes and 30- year bonds next week. “You really cannot conceptualize a scenario where the Fed can entertain tightening with over 10 percent on the unemployment rate,” said Mitchell Stapley , the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion. The two-year note yield fell five basis points on the week, or 0.05 percentage point, to 0.84 percent, according to BGCantor Market Data. It touched 0.8321 percent yesterday, the lowest level since May 21. The 1 percent security maturing in October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 9/32. The 10-year note yield rose 11 basis points to 3.50 percent. Payrolls fell by 190,000 last month, more than forecast by economists, a Labor Department report showed yesterday in Washington. The jobless rate rose from 9.8 percent in September. ‘Lots of Frowns’ “The unemployment rate is what everybody’s going to focus on,” said William O’Donnell , U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. “That’s ultimately what’s going to resonate in the press and the halls of Congress, where I’m sure there are lots of frowns.” The U.S. economic recovery will probably “run out of gas” as it heads toward a “new normal” of lower long-term growth and higher unemployment than over the previous decade, Nobel laureate Edmund Phelps said. While the economy grew the most in two years in the third quarter and the decline in payrolls may bottom in the first quarter of 2010, that doesn’t change the fact that the economy has lost its “dynamism,” Phelps, a professor at Columbia University in New York, said in an interview with Bloomberg Television. The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — reached a record 17.5 percent from 17 percent in September. ‘Slow Grind’ “The job market will have to stabilize and maybe get better before we see the Fed doing anything,” said Jay Mueller , who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “This is going to be a slow grind in terms of recovery.” The government will sell $40 billion of three-year notes on Nov. 9, $25 billion of 10-year notes Nov. 10, and $16 billion of $30 bonds Nov. 12, all records. President Barack Obama has pushed the nation’s marketable debt to $6.95 trillion. Foreign investors bought $371.9 billion of Treasuries since the start of 2009 through August, according to Treasury data, while Fed custodial holdings of U.S. government debt for foreign central banks have increased 26 percent to $2.15 trillion since the start of the year, according to Fed data. Banks are expected to continue adding to their holdings after increasing their purchases 26 percent to $125 billion in the 12 months through June, Fed data show. ‘Easily Absorbed’ “The market has easily absorbed supply, even though it’s been huge by any standard,” said Christopher Sullivan , who oversees $1.4 billion as chief investment officer at United Nations Federal Credit Union in New York. Two-year note yields declined on Nov. 4 after the Fed reiterated that its target rate will stay near zero for an “extended period.” The central bank said that its commitment to “exceptionally low” rates depends on “low rates of resource utilization, subdued inflation trends and stable inflation expectations.” The difference between rates on 10-year notes and TIPS touched 2.19 percentage points yesterday, the most since Aug. 28, 2008, indicating concern about rising consumer prices was the highest since before the collapse of Lehman Brothers Holdings Inc. Gold futures jumped to a record, topping $1,100 an ounce, on mounting speculation that low U.S. borrowing costs will drive the dollar lower, boosting the appeal of the precious metal as an alternative investment. Increased Issuance Increased issuance of long-term Treasuries and the Fed on hold for the foreseeable future pose risks for investors, said Arthur Bass , a managing director of derivatives in New York at the brokerage Newedge USA LLC. Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of government debt. The average maturity is currently about 53 months, according to Treasury data, below the historical average of about five years. “The long end of the Treasury market is potentially in trouble,” Bass said. “The dollar has shown some weakness and gold is telling you where people are marching with their feet and putting their assets. All of that portends a steeper yield curve and risk to the long end.” The Australian dollar has gained 25 percent, the euro 12 percent and Canadian dollar 10 percent against the greenback since the beginning of May as the Fed’s commitment to holding borrowing costs near zero has led investors to sell dollars and buy higher yielding currencies. Low rates and Fed purchases of Treasuries and mortgage debt, combined with the Obama administration’s $787 billion fiscal stimulus, helped boost gross domestic product 3.5 percent from July to September. Without the auto industry, which benefited from the government’s “cash for clunkers” program, growth would have been 1.9 percent. U.S. economic growth will slow to 2.4 percent this quarter, according to a Bloomberg survey of banks and securities companies. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net ; Daniel Kruger in New York at dkkruger1@bloomberg.net .

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Treasury 10-Year Yield Jumps After Fed Policy Makers Say Economy Improving

November 4, 2009

By Susanne Walker and Daniel Kruger Nov. 4 (Bloomberg) — Treasuries fell for a third day after Federal Reserve officials said they’re more optimistic about the economic outlook and the U.S. announced plans to sell $81 billion in notes and bonds next week. Yields on 10-year notes rose even as central bankers repeated their pledge to leave the target rate for overnight loans between banks in a range of zero to 0.25 percent for an “extended period.” The gap in yields between two- and 10-year notes widened to 264 basis points, the most since July 27. “The longer the Fed doesn’t change anything in terms of their assessment, it pushes rate hikes out into the future,” said Christopher Bury, co-head of fixed-income rates at Jefferies & Co., one of the 18 primary dealers that trade with the central bank. “To the extent the market is worried that they’d be behind the curve and late to tighten, that would be inflationary.” The 10-year note yield rose eight basis points, or 0.08 percentage point, to 3.55 percent at 3:08 p.m. in New York, according to BGCantor Market Data. Yields on the two-year note, most sensitive to interest- rate changes, fell two basis points to 0.90 percent. Thirty-year bond yields climbed nine basis points to 4.42 percent. The Fed completed its $300 billion program of purchasing Treasuries last month. Today’s statement said the central bank will purchase a total of $1.25 trillion of agency mortgage- backed securities and “about $175 billion of agency debt” through the first quarter of next year. Inflation Expectations “The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion is consistent with the recent path of purchases and reflects the limited availability of agency debt,” the statement said. “It’s on the dovish side,” said Alex Li, an interest-rate strategist in New York at Credit Suisse AG, another primary dealers. “It raises investors’ concern for the long rates. They are going to stay low and long-term inflation expectations may be going up.” The difference between rates on 10-year notes and Treasury Inflation Protected Securities , which reflects the outlook among traders for consumer prices, rose to 2.13 percentage points, equaling the high for the year set on June 10. The so-called breakeven rate was 0.01 percentage point on Dec. 31. Treasuries lost 2.8 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index, amid concern the economy shows signs of emerging from the longest recession in at least 50 years and debt sales climbed. Borrowing Estimates The government will sell $40 billion of three-year notes, $25 billion of 10-year debt and $16 billion of 30-year bonds next week, equaling the average forecast of $81 billion in securities from six of the primary dealers that will bid on the three auctions. The amounts are all records, according to data compiled by Bloomberg. The Treasury cut its estimate for government borrowing in the current quarter by 43 percent largely because of reductions in a program for helping the Fed manage its balance sheet . Borrowing will total a net $276 billion from October through December, compared with a previous estimate of $486 billion, and it projects borrowing $478 billion in the three months to March 31, the department said Nov. 2. In the quarter that ended Sept. 30, the Treasury borrowed $393 billion, compared with $406 billion projected three months ago. President Barack Obama said Oct. 29 in a speech at the White House that U.S. economic growth in the third quarter affirms that the recession is abating. A Commerce Department report that day showed the economy expanded at a more-than- forecast 3.5 percent annual rate in the quarter. Employment Report A Labor Department report on Nov. 6 may show the jobless rate rose to 9.9 percent in October, even as the economy returned to growth. Companies in the U.S. cut payrolls an estimated 203,000 jobs in October, according to a report today from ADP Employer Services, compared with a revised 227,000 drop the prior month. The figures were forecast to show a decline of 198,000 jobs, according to the median estimate of a Bloomberg survey. The Federal Open Market Committee was expected to leave its benchmark rate unchanged, according to all 95 economists in a Bloomberg survey. The Fed has held its target rate for overnight loans between banks at zero to 0.25 percent since Dec. 16. The Obama administration has increased the public debt to a record $7.01 trillion as it borrows unprecedented amounts to fund economic-stimulus plans. The figure is equivalent to almost half of the $14.2 trillion economy, according to data compiled by Bloomberg. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net ; To contact the reporters on this story: Daniel Kruger in New York at dkkruger1@bloomberg.net

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Treasuries Fall on Existing Home Sales Jump, Bernanke Outlook on Growth

August 22, 2009

By Daniel Kruger Aug. 22 (Bloomberg) — Treasuries fell for a second week as reports showed stabilization in the housing industry and Federal Chairman Ben S. Bernanke said the global economy is “beginning to emerge” from recession. Two-year note yields gained the most since the five days ended Aug. 7 after starts of single-family dwellings rose for a fifth month and sales of existing homes surged in July. Bernanke said that “prospects for a return to growth in the near term appear good.” The U.S. announced plans to sell $109 billion of two-, five- and seven-year notes next week, equal to the record for that combination of maturities. “It’s the trifecta coming into play,” said Kevin Flanagan , a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “Bernanke’s comments, which were interpreted to be more on the upbeat side than one would have originally thought. The existing home sales figures, adding to that. And you can’t dismiss the fact we have supply next week.” The yield on the two-year note rose four basis points on the week, or 0.04 percentage point, to 1.09 percent, according to BGCantor Market Data. The 1 percent security maturing July 2011 fell 2/32, or 31 cents per $1,000 face amount, to 99 26/32. The five-year note yield climbed five basis points to 2.56 percent and the seven-year note yield increased three basis points to 3.20 percent. Yields on 10-year notes were flat on the week and 30-year bond yields declined five basis points as producer prices fell 0.9 percent in July, more than forecast, capping the biggest 12- month drop on record, according to a Labor Department report released Aug. 18. The 10-year yield dropped as low as 3.37 percent, the lowest since July 14, after falling 28 basis points last week, the most since December. ‘Aggressive’ Central Banks The global economy is beginning to emerge from recession after “aggressive” action by central banks and governments, Bernanke said in a speech yesterday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Bernanke, speaking to an audience of central bankers and academic, warned that the world still confronts “critical” challenges. “Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.” The note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its program to buy Treasuries. Future ‘Consequences’ Policy makers have more than doubled the Fed’s balance sheet to $2.06 trillion since last September as central bankers have committed to buying assets, including $300 billion of Treasuries and $1.45 trillion of mortgages and agency debt to thaw credit markets that froze last year. The flood of liquidity could lead to speculative bubbles due to limited opportunities for investment, according to Joseph Stiglitz , winner of the Nobel Prize for economics. “As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future?” Stiglitz, a professor at Columbia University, said at a conference in Bangkok yesterday. “Right now we’re facing deflation, but some time in the future, there will be consequences.” The U.S. 10-year breakeven rate, a gauge of investor expectations for inflation that measures the difference in yield between index-linked and conventional bonds, rose to 190 basis points yesterday, from 9 basis points at the start of the year. The spread has averaged 220 basis points in the past five years. Employment Concerns Stocks advanced, with the Standard & Poor’s 500 Index gaining 2.2 percent on the week as investors bet on recovery. The economy is forecast to grow at an annualized rate 2.2 percent in the third quarter and 2 percent in the fourth quarter, according to a Bloomberg News survey of 57 economists. Rising job losses could temper gains in riskier assets. While the unemployment rate dipped last month, economists project it will reach 10 percent by early next year, restraining consumer spending. More Americans than forecast filed claims for jobless benefits last week. Applications rose to 576,000 the week ended Aug. 15, above the 550,000 median estimate of economists surveyed by Bloomberg News. “We will hold off on making a call on the payroll report pending more data, but the indications from claims thus far suggest that it will be on the disappointing side relative to last month’s outcome,” Goldman Sachs Group Inc. economists in New York led by Jan Hatzius wrote in a note to clients Aug. 20. Treasury 10-year yields climbed the most in a week since 2003 for the week ended Aug. 7 after the Labor Department said the economy lost 247,000 jobs in July, fewer than the 325,000 forecast in a Bloomberg News survey. More Supply The U.S. will sell $42 billion of two-year notes, $39 billion of debt maturing in five years and $28 billion of seven- year securities on three consecutive days beginning Aug. 25, equal to the amount of those notes sold last month. The Treasury’s sales last month of 2- and 5-year notes drew lower-than-forecast interest from investors amid concern the government’s deluge of borrowing would overwhelm demand. The Fed bought $2.599 billion in Treasuries during the week, the least since its program began in March, bringing its total purchases to $262.377 billion. The central bank on Aug. 19 announced plans to buy debt three times over the next two weeks, down from four times per two-week period. Policy makers said Aug. 12 they plan to slow the pace of Treasury purchases as the recession eases and signaled that the $300 billion program will end in October. The buying was previously scheduled to end in September. ‘Uncharted Territory’ The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency, billionaire Warren Buffett said. The “gusher of Federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery, Buffett wrote in a New York Times commentary Aug. 19. While he applauded measures adopted by the Fed and officials from the administrations of George W. Bush and Barack Obama , Buffett said the U.S. is fiscally in “uncharted territory.” Marketable Treasury debt has increased 50 percent to $6.78 trillion since the end of 2007 as Bush and Obama borrowed to sustain the economy and the financial system after the U.S. entered its longest economic contraction since the Great Depression. The National Bureau of Economic Research, which dates business cycles, said the recession began in December 2007. The non-partisan Congressional Budget Office forecast the budget deficit for fiscal 2009, ending Sept. 30, will reach a record $1.85 trillion. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net .

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China Purchasing U.S. Treasuries Proves That Dollar’s Demise Exaggerated

August 17, 2009

By Daniel Kruger and Anchalee Worrachate

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Treasuries Fall as $39 Billion Five-Year Sale Yields Higher Than Expected

July 29, 2009

By Susanne Walker and Daniel Kruger July 29 (Bloomberg) — Treasury five-year notes fell as the government sold a record $39 billion of the securities , the third of four auctions totaling $115 billion that is the largest amount of so-called coupon securities sold in a single week.

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Treasuries Fall as $39 Billion Five-Year Sale Yields Higher Than Expected

July 29, 2009

By Susanne Walker and Daniel Kruger July 29 (Bloomberg) — Treasury five-year notes fell as the government sold a record $39 billion of the securities , the third of four auctions totaling $115 billion that is the largest amount of so-called coupon securities sold in a single week. The notes drew a yield of 2.689 percent, compared with a forecast of 2.635 percent in a Bloomberg News survey of eight of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered was 1.92, compared with an average of 2.2 at the last 10 auctions. “We’ve got $39 billion in fives here,” said Charles Comiskey, head of U.S

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