Treasury Yields Rise From 17-Month Low as Fed-Purchase Speculation Eases
Aug. 18 (Bloomberg) -- Dennis Gartman, an economist and editor of the Gartman Letter, talks about the U.S. Treasury market. Gartman, speaking with Margaret Brennan on Bloomberg Television's "InBusiness," also discusses hedge-fund icon Stanley Druckenmiller's plan to shut his firm and the outlook for commodities and currencies. (Source: Bloomberg)
U.S. 10-year Treasury yields climbed before a report forecast to show manufacturing in the Philadelphia area expanded at a faster pace in August, damping speculation the Federal Reserve will increase bond purchases.
The bonds’ decline pushed yields up from near their lowest in 17 months. An index of U.S. leading indicators probably rose in July for the second time in four months, indicating continued growth for the remainder of the year. The Fed plans to purchase Treasuries due from August 2016 through August 2020 as part of its plan to spur the economy by keeping borrowing costs down.
“To justify these kind of yield levels you’re talking about crisis scenarios of the type we saw in 2008 or Japan-style deflation,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London. “While we can’t rule that out, it’s normal to get a degree of reassessment given how far the market has come.”
U.S. 10-year yields rose four basis points to 2.67 percent as of 6:51 a.m. in New York. The 2.635 percent security due August 2020 fell 10/32, or $3.13 per $1,000 face amount, to 99 20/32. Two-year yields were little changed at 0.5 percent, while 30-year yields climbed two basis points to 3.75 percent.
The Federal Reserve Bank of Philadelphia’s general economic index rose to 7.2 this month from 5.1 in July, according to the median estimate of 56 economists in a Bloomberg survey. Readings above zero signal growth in the regional gauge, which covers eastern Pennsylvania, southern New Jersey and Delaware.
Treasury Sales
The Conference Board’s gauge of the outlook for the next three to six months rose 0.1 percent after falling 0.2 percent in June, according to the median forecast of 58 economists surveyed by Bloomberg News.
The Treasury will say today it plans to sell $102 billion of two-, five- and seven-year notes next week, the smallest monthly offering of the combination since May 2009, according to a survey of primary dealers, who are required to bid at the auctions.
The Treasury will also sell $7 billion in 30-year Treasury Inflation Protected Securities, lower than the $8 billion sold in February when the debt was reintroduced for the first time since 2001, the Wall Street firms said.
Treasuries rallied this year on concern the U.S. economic recovery is faltering. An index of U.S. economic surprises fell to minus 57.3 on Aug. 16, the lowest since January 2009, as data has fell short of expectations.
U.S. gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.
Bonds Versus Stocks
An index of global sovereign bonds has returned 5.9 percent this year, data compiled by Bank of America Merrill Lynch shows, as investors sought the relative safety of bonds. MSCI’s World Index of shares handed investors a 2.2 percent loss after accounting for reinvested dividends. Corporate bonds returned 8.1 percent globally this year, a separate Merrill Lynch index showed.
“As long as it looks like we’re going to have a weaker economy relative to expectations of just a few weeks ago, rates will stay down here,” Paul McCulley at Pacific Investment Management Co., which runs the world’s biggest bond fund, said in an interview yesterday. “I would be tilted toward high- quality corporates right now” because they offer higher yields, he said.
An index of U.S. company bonds yields 2.94 percentage points more than Treasuries, according to the Bank of America data. The difference has increased from this year’s low of 2.37 percentage points in April.
Japanese Buying
The Fed’s purchases today will be the second this week, after it bought $2.551 billion of notes on Aug. 17. The central bank plans to purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage-backed securities, according to its website.
Japanese investors bought 2.17 trillion yen ($25.5 billion) more foreign bonds and notes that they sold last week, the Finance Ministry said today in Tokyo. The purchases, the most since the data began in 2001, came as benchmark yields in the nation fell to a seven-year low.
The yield on Japan’s 10-year bond dropped to 0.90 percent yesterday, the least since Aug. 13, 2003. The yield climbed to 0.95 percent today.
Japan’s purchases of U.S. government debt may help offset reductions by China, which cut its holdings for a second month in June. President Barack Obama is relying on overseas investors as he borrows to sustain the U.S. economic expansion, increasing the U.S. publicly traded debt to a record $8.18 trillion.
China Holdings
China, America’s largest creditor, owns 10 percent of the publicly traded U.S. debt, according to Treasury Department figures. It cut its holdings by 2.8 percent in June to $843.7 billion, the least in a year.
Investors in Japan own the second-largest position with $803.6 billion of the securities, or 9.8 percent. Japanese investors increased holdings by 2.2 percent in June, bringing their stake to a record, the Treasury data show.
U.S. 10-year Treasuries yield 1.71 percentage points more than similar-maturity Japanese bonds, according to data compiled by Bloomberg. The difference has narrowed from this year’s high of 2.61 percentage points in April.
Fed Bank of St. Louis President James Bullard is scheduled to make a speech about the U.S. economy in Arkansas at 11:30 a.m. local time today.
The central bank may have to buy more assets if inflation slows further, Bullard, president of the Fed Bank of St. Louis, told the Wall Street Journal on Aug. 17.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
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