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Treasuries Rise as Fed Prepares to Buy Debt, Europe Debt Concerns Emerge
Treasuries rose before today’s Federal Reserve purchases of government debt as renewed concern that Europe’s financial system may need support sparked demand for the safest assets.
Longer-maturity bonds led the advance after Financial Times Deutschland reported that European Central Bank Executive Board member Juergen Stark said some German banks need more capital. The Fed will buy debt maturing in 2013 and 2014 as part of its plans to purchase $18 billion of securities by the middle of this month to keep borrowing costs low.
“It is still far from clear about how severe an economic slowdown will be, even as concerns over a double-dip recession have eased,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, one of the 18 primary dealers required to bid at Treasury debt sales. “There is no strong reason to sell bonds right now.”
The yield on the 10-year note fell 3 basis points to 2.63 percent at 8:32 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 gained 8/32, or $2.50 per $1,000 face amount, to 99 31/32.
Stark told members of Chancellor Angela Merkel’s Christian Democrat party that Germany’s Sparkasse savings banks, which were not included in recent European stress tests, and state- owned Landesbanks are particularly at risk, FTD reported. The euro fell as much as 0.3 percent against the dollar.
Treasuries have returned 8 percent this year after losing 3.7 percent in 2009, according to Bank of America Merrill Lynch indexes, as investors sought safer assets.
Bank of Korea
U.S. debt also gained as the Bank of Korea unexpectedly left its benchmark interest rate unchanged, signaling concern that slowing external demand will hurt exports in Asia’s fourth- biggest economy.
Governor Kim Choong Soo kept the seven-day repurchase rate at 2.25 percent, a result predicted by only four of 14 economists surveyed by Bloomberg. The rest forecast a quarter- point increase following a similar move in July.
President Barack Obama is proposing to expand tax relief for businesses and boost federal spending on transportation to help bolster the economy. In Milwaukee on Sept. 6, Obama called for $50 billion for a six-year program to fix roads and railways, and modernize the air-traffic-control system.
Roubini Comments
“All three proposals -- the R&D tax credit, investment tax credit and infrastructure -- make reasonable economic sense,” New York University Professor Nouriel Roubini told reporters yesterday before an evening speech hosted by the C.D. Howe Institute in Toronto. “However, the size of them is not large enough to make a difference for the economic outlook.”
The U.S. will have a “fiscal drag” of 1.5 percent of gross domestic product into next year, and even if Obama’s proposals are implemented, it would “lead to a slightly smaller fiscal drag,” Roubini said.
The 30-year bonds being sold today yielded 3.74 percent in pre-auction trading, compared with the highest yield of 3.954 percent at the previous offering on Aug. 12.
Investors last month bid for 2.77 times the amount of debt on offer, versus 2.89 in July. Indirect bidders, the investor group that includes foreign central banks, bought 46 percent of the securities, versus 37.4 percent in July.
Today’s offering of 30-year bonds is the last of three auctions this week totaling $67 billion.
Yesterday’s auction of 10-year Treasury notes drew a yield of 2.67 percent, the lowest since January 2009.
Jobs Report
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.21, compared with an average of 3.06 for the previous 10 sales. Indirect bidders, an investor class that includes foreign central banks, purchased 54.7 percent of the 10-year notes, the highest share since September 2009.
The auction was a reopening of securities that were originally sold on Aug. 11.
Gains in Treasuries were tempered before reports this week that economists said will show U.S. initial jobless claims fell, Japan’s economy expanded and French output rose.
Initial jobless claims fell to 470,000 last week from 472,000 the prior period, according to a Bloomberg News survey before the report today. Treasuries slumped on Sept. 3 after Labor Department figures showed U.S. companies hired more workers than economists predicted last month.
Beige Book
Japan’s gross domestic product rose at an annual 1.5 percent rate in the second quarter, quicker than the 0.4 percent reported in preliminary figures last month, and French industrial production rose 0.7 percent in July, according to separate surveys before tomorrow’s figures.
“Worries that the economy will slip into a double-dip recession were apparently overdone,” said Hiroki Shimazu, a senior market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “The latest bout of bullish sentiment toward Treasuries may come to a halt.”
The Federal Reserve said in its Beige Book report released yesterday that the economy maintained its expansion while showing “widespread signs” of a deceleration.
“The Beige Book depicts mixed economic activity in an uneven recovery that lost some momentum in recent months,” Ward McCarthy, chief financial economist in New York at Jefferies Group Inc., wrote in a research note to clients. “The economy continues to grow, with negligible inflation pressures.” The firm is one of the 18 primary dealers obligated to participate in U.S. debt auctions.
The Fed said 5 of its 12 regional banks reported “economic growth at a moderate pace” and 2 pointed to “positive developments or net improvements.” The remaining 5 said conditions were mixed or decelerating.
To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
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