Treasury Yields Near Six-Week Low on Weaker Stocks, China Rate Speculation

The two-year Treasury yield was near the lowest in six weeks as stocks declined and accelerating Chinese economic growth fuelled concern the government will raise interest rates further to calm inflation.

U.S. housing data today is expected to show the market is having trouble recovering. It comes after Commerce Department figures yesterday showed housing starts fell to the lowest since October 2009. China’s growth accelerated to 9.8 percent in the fourth quarter as industrial production and retail sales picked up. Asian and European stocks and U.S. equity futures declined.

“Event risk is still high, so as long as these potential safe-haven triggers are firmly in place that should keep a tight lid on Treasury yields, said David Schnautz, a fixed-income strategist at Commerzbank AG in London.”

Two-year note yields were little changed at 0.58 percent as of 7:25 a.m. in New York, according to data compiled by Bloomberg. The price of the 0.625 percent security maturing in December 2012 was at 100 2/32. The rate dropped as low as 0.55 percent on Jan. 18, the least since Dec. 8. Benchmark 10-year yields were little changed at 3.35 percent.

The MSCI Asia Pacific Index of shares dropped 1.3 percent today, the most in two months. The Stoxx Europe 600 Index slid 0.9 percent. Futures on the Standard & Poor’s 500 were 0.1 percent lower after the index dropped the most since November yesterday.

“We saw in Asia how the market reacted, and it traded with a positive spin” for government bonds, said Peter Schaffrik, head of European fixed-income strategy at RBC Capital Markets in London. Treasuries may gain further “if we see a continued selloff,” he said.

Labor Report

The Labor Department is scheduled to release figures today that may show initial applications for jobless benefits fell 25,000 last week to 420,000, according to economists in a Bloomberg survey.

Purchases of existing homes probably increased 4.1 percent in December from November to a 4.87 million annual rate, according to the median forecast of economists surveyed by Bloomberg News before the National Association of Realtors reports the figure today. The average rate for the past 10 years is 5.81 million. Housing starts fell 4.3 percent, Commerce Department figures showed yesterday.

The U.S. is scheduled to sell $13 billion of 10-year Treasury Inflation Protected Securities today. The securities yield 0.91 percent, up from 0.409 percent at the last auction of the securities on Nov. 4 when investors bid for 2.91 times the amount of debt offered, versus the 10-sale average of 2.73. Indirect bidders, including foreign central banks, bought 57.7 percent of the notes, the most since 2006.

TIPS

TIPS returned 6.3 percent in 2010 and 10 percent in 2009, beating conventional Treasuries each year, according to Bank of America Merrill Lynch data.

Record U.S. budget deficits and a lack of plans to reduce the nation’s debt may undermine confidence in the dollar and raise inflation concerns, Fitch Ratings Services said in a report yesterday. The cost to protect Treasuries from losses using credit-default swaps was the highest in almost a year.

“The U.S. fiscal metrics will be the worst of any ‘AAA’ rated sovereign,” Fitch said. “However, the extraordinary fundamental credit strengths associated with the flexibility and dynamism of the U.S. economy, as well as the U.S. dollar’s status as the global reserve currency, imply a higher debt tolerance than for other ‘AAA’ and highly rated sovereigns.”

‘A Lot of Supply’

President Barack Obama has increased the marketable debt to a record $8.86 trillion as he tries to sustain growth. The government plans to announce today the sizes of three auctions set for next week.

The sales will probably consist of $35 billion in two-year notes, the same amount of five-year debt and $29 billion of seven-year securities, according to the average forecast of nine primary dealers in a Bloomberg survey. The 18 primary dealers are required to bid at the sales.

“We will see a lot of supply,” said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $68 billion in assets. “That’s the main driver that will send yields higher.”

Ten-year yields will rise to 3.75 percent by the end of March, he said.

Treasuries gained yesterday as the Federal Reserve purchased $7.7 billion of government bonds, part of its plan to scoop up $600 billion of debt to spur the economy. The central bank will buy $1.5 billion to $2.5 billion of debt maturing from August 2028 to November 2040 today, according to its website.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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