Treasuries Drop Amid Speculation ECB Will Halt Crisis, Economy Will Grow
Treasuries fell as speculation the European Central Bank may take additional steps to prevent the euro region’s debt crisis from spreading diminished the appeal of U.S. securities as a haven.
The 10-year note fell for the first day in four before reports that economists said will show U.S. manufacturing expanded for a 16th month and companies added the most jobs since the recession began in December 2007. The declines pushed the yield on the 10-year note higher after reaching its lowest level in a week yesterday. The Federal Reserve is scheduled to buy $7 billion to $9 billion of notes maturing from June 2016 to November 2017 today as part of its plan to spur growth.
“Treasuries are losing some of their safe-haven appeal,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Yields reached levels yesterday which are frankly unattractive. Labor data this week may decide if this correction in Treasuries continues.”
The benchmark 10-year yield rose six basis points to 2.87 percent at 6:57 a.m. in New York, according to BC Cantor Market Data. The yield fell to 2.75 percent yesterday, the lowest level since Nov. 23. The 2.625 percent security due in November 2020 fell 16/32, or $5 per $1,000 face amount, to 97 30/32.
The 30-year bond yield climbed five basis points to 4.16 percent. It fell to 4.05 percent yesterday, the lowest level since Nov. 5.
Ten-year rates will rise to 3.23 percent by the end of 2011, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Investors who bought today would lose about 0.2 percent after accounting for interest payments, data compiled by Bloomberg show.
The Institute for Supply Management’s factory index will be 56.5 in November versus 56.9 in October, based on the median estimate of economists surveyed by Bloomberg News. Figures above 50 signal growth.
“A strong ISM number will give investors hope the economic recovery is on track,” Ostwald said.
ADP Employer Services will say employment rose by 70,000 in November, a separate Bloomberg survey showed. The Labor Department will report on Dec. 3 that employers added jobs for a second month, economists said.
Treasuries rose yesterday on speculation Ireland’s funding crisis will spread to Portugal and Spain. Ireland on Nov. 28 became the second country to tap European assistance, following Greece. The Irish rescue package is worth 85 billion euros ($111 billion).
Standard & Poor’s said yesterday it may cut Portugal’s credit ratings on concern the government has made little progress on boosting economic growth. Portugal’s borrowing costs increased at an auction today.
“Investors are worried that there is more to come,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients.
ECB President Jean-Claude Trichet yesterday said the central bank’s bond-buying program is “ongoing” and “we will see what we decide,” refusing to rule out an expansion of purchases. His remarks helped lift the euro today.
Europe’s debt crisis will “die down” soon, Adam Carr, a senior economist at ICAP in Sydney, wrote to clients today. “Things will fizzle out. The U.S. economy is doin’ just fine.”
Demand for safety helped pull 10-year yields down 16 basis points from their highest level in November.
“It is interesting how little help a burgeoning sovereign- debt crisis lent to the rates markets,” analysts including George Goncalves at Nomura Holdings Inc. in New York wrote in a research note yesterday. “This only added more evidence to our assertion that the rates market may already be fully priced.” Nomura is one of the 18 primary dealers that are required to bid at the government debt sales.
Demand for safety is showing up in the widening two-year interest-rate-swap spread. The gap expanded to 31 basis points, the most in four months. In this transaction, investors exchange fixed and floating interest rates. The spread is the difference between the fixed rate and the yield on similar-maturity Treasuries. Because the figure compares a bank rate with a government yield, it is used as a gauge of risk appetite.
Banks are charging more to lend to each other. The three- month London interbank offered rate for dollars rose to 0.30 percent yesterday, the most since August. Pacific Investment Management Co., which runs the world’s biggest bond fund, said today that debt is attractive.
“In a low-growth environment, global bonds are a compelling investment option,” according to a press release from Pimco, which is based in Newport Beach, California.
U.S. government securities handed investors a 0.7 percent loss last month, the most since March based on Bank of America Merrill Lynch indexes, as the Fed embarked on a plan to pump $600 billion into the banking system.
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