Treasuries Rise, Pushing Two-Year Note Yield Toward Record Low Before Sale
Aug. 23 (Bloomberg) -- Michael Pond, co-head of U.S. interest-rate strategy at Barclays Plc, discusses the outlook for Treasuries and investor sentiment. Pond talks with Jon Erlichman on Bloomberg Television’s “In the Loop With Betty Liu.” (Source: Bloomberg)
Aug. 23 (Bloomberg) -- Charles Bobrinskoy, director of research for Ariel Investments, and Pat Kernan, an options trader at Cardinal Capital Management, talk about the outlook for the U.S. stock and bond markets. They talk with Matt Miller, Dominic Chu and Adam Johnson on Bloomberg Television's "Street Smart."(Source: Bloomberg)
Treasuries advanced on concern the U.S. recovery is stalling, pushing two-year note yields to within three basis points of a record low before tomorrow’s $37 billion government auction of the debt.
Ten-year notes gained as speculation the economy may slip into another recession blunted a rally in stocks. The $7 billion sale today of 30-year inflation-linked bonds attracted the highest demand on record.
“Anything that is fixed-income is in demand,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “Every auction is going well these days irrespective if there is inflation compensation.”
The 10-year note yield dropped 2 basis points, or 0.02 percentage point, to 2.60 percent at 4:05 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 increased 5/32, or $1.56 per $1,000 face amount, to 100 1/4.
The yield on benchmark government debt fell on Aug. 20 to 2.53 percent, the lowest level since March 2009. The two-year note yield dropped today 1 basis point to 0.49 percent after touching a record low 0.4547 percent on Aug. 20.
U.S. stocks fell today, with the Standard & Poor’s 500 Index dropping 0.4 percent after earlier advancing 0.9 percent. The Dow Jones Industrial Average slid 0.4 percent.
TIPS Auction
Today’s auction of 30-year Treasury Inflation Protected Securities, or TIPS, drew a yield of 1.768 percent, the lowest ever for sales of the debt dating to 1998. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was a record high 2.78.
The sale was a reopening of the $8 billion auction of 30- year TIPS on Feb. 22. That offering was the first of the debt since 2001, when the Treasury stopped selling all so-called long bonds. The U.S. introduced a 20-year inflation-indexed security in 2004, which it stopped selling last year to make room on the auction calendar for 30-year TIPS.
Indirect bidders, an investor class that includes foreign central banks, bought 38.9 percent of the bonds today, compared with 42.4 percent in February. Direct bidders purchased 28 percent of the bonds, compared with 6.4 percent.
The 30-year break-even rate, the difference in yield between the inflation-linked securities of that maturity and comparable conventional Treasuries, fell on Aug. 20 to 1.87 percentage points, the lowest level since September 2009. The gauge of investors’ outlook for inflation gained 3 basis points to 1.94 percentage points today.
Barclays’s View
“The market’s saying this slow pace isn’t going to last for 2, 3, 4 years but for 10 or 20 or 30 years,” said Michael Pond, co-head of U.S. interest-rate strategy at Barclays Plc, in a radio interview on “Bloomberg Surveillance” with Tom Keene. “Very long-term inflation expectations have come down almost as much as those shorter-term inflation expectations. The break- even market is saying the Fed won’t be able to get us out of this problem any time soon.”
In addition to today’s TIPS offering and tomorrow’s two- year note auction, the government will sell $36 billion in five- year debt on Aug. 25 and $29 billion in seven-year securities the following day. The $102 billion of notes being sold this week is the smallest total for this combination of securities since May 2009.
Federal Reserve Chairman Ben S. Bernanke will discuss the outlook for the U.S. economy on Aug. 27 at a conference in Jackson Hole, Wyoming. Following the Aug. 10 policy meeting, the central bank set a floor on its securities holdings and said growth would be “more modest in the near term than had been anticipated.”
U.S. Growth
A Commerce Department update on Aug. 27 is forecast by economists to show the U.S. economy grew at 1.4 percent pace in the second quarter, which would be the slowest rate since the recovery began in the middle of last year. A 2.4 percent pace was calculated last month.
“There should be demand for the auctions as people want to hold Treasuries going into Bernanke’s Friday speech,” said Sean Murphy, a Treasury trader at Societe Generale in New York.
Though economists are paring their forecasts, they still predict growth in gross domestic product of 3 percent this year and 2.8 percent in 2011, according to the median of estimates in a Bloomberg News survey.
“The economy is improving, and the yield curve will stay steep as the market is pricing in a return to more normal rates further out the curve,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, a primary dealer. “We are seeing subpar growth and a muddling along that is not particularly satisfying, but we are on the path to an eventual return to normal growth.”
The Fed will 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. The central bank plans to buy notes due from 2013 to 2014 tomorrow and debt maturing from 2021 to 2040 on Aug. 26.
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net
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