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Treasury 10-Year Notes Head for Weekly Loss as Corporate Earnings Increase
Treasury 10-year notes headed for a weekly loss on speculation corporate earnings and a law granting $34 billion of extra payments to the unemployed will keep the U.S. economy from falling back into recession.
Longer maturities slid as stocks around the world rallied, reducing demand for the relative safety of government debt. Two- year yields, which track the Federal Reserve’s target for overnight lending because of their short maturity, stayed near a record low as traders bet the central bank will keep borrowing costs down to foster the economic expansion.
“We’re not having a double dip recession,” said Rob da Silva, who helps oversee $220 billion at Principal Global Investors in Sydney, part of Principal Financial Group Inc. in Des Moines, Iowa. “Our outlook for Treasuries is that yields will go up. Risk sentiment seems to be relatively positive.”
Ten-year notes yielded 2.94 percent as of 6:19 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 traded at 104 23/32. The rate climbed two basis points this week. Two-year notes yielded 0.56 percent, versus yesterday’s record low of 0.5519.
The 10-year yield, a benchmark for corporate borrowing and mortgage rates, may rise as high as 3.75 percent in the 12 months, da Silva said. The yield will increase to 3.31 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
Microsoft Earnings
MSCI’s Asia Pacific Index of shares rose 1.8 percent after Microsoft Corp. yesterday posted its biggest sales gain in 2 1/2 years. AT&T Inc., United Parcel Service Inc. and EBay Inc. also reported earnings that surpassed analysts’ estimates. The MSCI World Index of shares gained 2.2 percent this week.
President Barack Obama signed the extension for jobless benefits into law yesterday. Fed Chairman Ben S. Bernanke told lawmakers the same day that unemployment is “the most important” problem. The U.S. faces an “unusually uncertain” economy, the Fed chief said July 21.
Futures on the CME Group Inc. exchange show a 32 percent chance will boost its target lending rate for overnight bank loans at least a quarter-percentage point by April, compared with a 61 percent chance a month ago.
European regulators examining banks in the region are scheduled to deliver results of their tests today, as governments seek to ease concern that lenders aren’t strong enough to withstand a recession.
Slowing Growth
Treasuries have benefitted this year as a slowing in the global economy led investors to seek the safest assets. U.S. government securities returned 6.3 percent in 2010, according to Bank of America Merrill Lynch indexes. The MSCI World index handed investors a 3.1 percent loss after accounting for reinvested dividends.
“People are more concerned about the outlook for the economy,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas Securities Japan Ltd. “That’s leading people to buy even at these levels.”
Ten-year yields will fall to 2.9 percent by the end of September, he said, approaching the 15-month low of 2.85 percent set July 21.
Yields indicate investors are becoming more willing to lend. The London interbank offered rate, which banks pay for three- month dollar loans, fell for a seventh day yesterday to 0.498 percent, the lowest level in two months.
The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, slid to 35 basis points from this year’s high of 49 basis points in June.
Japanese Demand
The spread between yields on U.S. corporate bonds and Treasuries shrank to 2.98 percentage points from 3.25 percentage points in June, according to the Bank of America indexes.
Japanese investors are snapping up foreign bonds, according to government data released today. They bought 1.3 trillion yen ($15 billion) more in overseas bonds and notes than they sold during the week ended July 16, the most in 10 months, a Ministry of Finance report showed.
Fukoku Mutual Life Insurance Co., which has the equivalent of $65.6 billion in assets, is among investors seeking higher yields in the U.S. than they can get at home, said Satoshi Okumoto, a general manager at the Tokyo-based company.
Two-year yields in Japan are 0.14 percent, the lowest of 30 bond markets tracked by Bloomberg data. Investors can earn an additional 42 basis points by buying same-maturity securities in the U.S. The spread has narrowed from about 1 percentage point in April.
The Treasury said yesterday it will auction $38 billion in two-year notes, $37 billion of five-year debt and $29 billion in seven-year securities over three days starting July 27.
The U.S. has cut the size of these monthly sales to $104 billion from $108 billion in June, $113 billion in May and $118 billion in April.
The U.S. budget deficit to $68.4 billion in June from $94.3 billion a year earlier, the Treasury reported on July 13. Even so, the government projects the deficit for the year ending Sept. 30 will reach a record $1.6 trillion.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
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