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Treasury 10-Year Yields Slide to 16-Month Low; Global Buying May Increase
Treasury 10-year note yields fell to their lowest level in more than 16 months as reports showed manufacturing in the New York region expanded less than forecast and foreign purchases of U.S. government debt climbed.
Two-year note yields dropped to a record low as the Federal Reserve prepared to buy Treasuries tomorrow as part of its plan to spur the slowing economy by keeping borrowing costs low. A report from the National Association of Home Builders/Wells Fargo showed builders unexpectedly turned pessimistic.
“The pace of improvement in the manufacturing sector is clearly slowing,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “With yields at the lowest level since the crisis, we are in another crisis. The two-year is more of a holding vehicle than a true investment at this point.”
Benchmark 10-year note yields fell 7 basis points to 2.60 percent at 10:38 a.m. in New York, according to BGCantor Market Data. They dropped as low as 2.579 percent, the least since March 2009, generic data compiled by Bloomberg show. The 2.625 security due in August 2020 rose 20/32 or $6.25 per $1,000 face amount, to 100 7/32.
Two-year debt yielded touched 0.4882 percent, after dropping below 0.50 percent this month for the first time. The 30-year yield slid as low as 3.74 percent, the lowest level since April 2009.
Chinese Sales
Global demand for long-term U.S. financial assets rose in June from a month earlier as investors abroad bought Treasuries and agency debt and sold stocks, the Treasury Department reported today in Washington. Net buying of long-term equities, notes and bonds totaled $44.4 billion for the month, compared with net purchases of $35.3 billion in May.
The European debt crisis led investors to buy American government securities as a safe haven, while shying away from equities and corporate bonds. Foreign holdings of Treasuries rose by $33.3 billion.
At the same time, the report showed that China’s holdings of long-term Treasuries fell for the first time in 15 months to $839.7 billion, a 2.5 percent drop. Its overall Treasury position declined for a second month to $843.7 billion, the lowest since May 2009. The decline represents the first year- over-year decline in China’s Treasury holdings since 2001. The holdings peaked in July 2009 at $939.9 billion.
“June represents a relatively weak month of debt buying,” David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut, wrote in a note to clients today. “What is notable is China’s selling of coupons.”
‘Short Order’
The Federal Reserve Bank of New York’s general economic index rose to 7.1 from 5.1 in July. The manufacturing index was forecast to expand to 8.3. Readings greater than zero signal expansion.
“We need to see a broad-based turnaround in the economy at this point to reverse the sentiment in the market,” said Christian Cooper, senior rates trader in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Fed. “We are entering an environment where every piece of data matters. We could get to 2.5 percent on the 10-year in short order.”
The National Association of Home Builders/Wells Fargo confidence index dropped to 13 this month, the lowest level since March 2009, from 14 in July, data from the Washington- based group showed today. Economists forecast a reading of 15, according to the median estimate in a Bloomberg News survey. Readings lower than 50 mean more respondents said conditions were poor.
Treasury Returns
Investors in a weekly survey by Ried Thunberg ICAP, a unit of ICAP Plc, the world’s largest inter-dealer broker, stuck to their bearish outlook following the market rally, the company said. Ried’s index on the outlook for Treasuries through December was unchanged at 44 for the seven days ended Aug. 13 versus the week before. A figure less than 50 shows investors expect prices to fall.
Treasuries have returned 7.6 percent this year, according to indexes compiled by Bank of America Merrill Lynch, as investors sought the relative safety of debt while equities tumbled. MSCI’s World Index of shares has fallen 4.1 percent in 2010, including reinvested dividends.
Money managers are moving more money than ever out of stocks and into bonds. About $185 billion was sent to bond funds through July 31, the most on record, according to the Investment Company Institute.
‘More Modest’
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Fed said Aug. 10. It announced it will invest the principal payments from its holdings of mortgage-backed securities into longer-term Treasury securities in the same statement.
Japan’s economy grew at less than a fifth of the pace last quarter than economists estimated, a government report showed, pushing the nation into third place behind the U.S. and China.
Japanese 10-year bond yields dropped as low as 0.95 percent, the least since 2003, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker.
Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit.
While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at primary dealer Bank of America Corp. in New York.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
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