Treasuries fell, paring weekly gains, on speculation insurers in Japan may sell U.S. government debt to pay claims on damage caused by the nation’s strongest earthquake on record.
Yields on 10-year notes had slid to the lowest level since January on demand for safety as the 8.9-magnitude temblor caused a 23-foot-high tsunami that killed hundreds in coastal towns. The yields had a weekly drop as fighting in Libya over control of oil installations spurred demand for a refuge.
“The events in Japan have spurred some thought that local domestic investors there may have to liquidate foreign assets to meet insurance claims,” said Chris Ahrens, head interest-rate strategist in Greenwich, Connecticut, at UBS AG, one of the 20 primary dealers that trade with the Federal Reserve.
Benchmark 10-year note yields increased four basis points, or 0.04 percentage point, to 3.40 percent at 5:11 p.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security maturing in February 2021 dropped 12/32, or $3.75 per $1,000 face amount, to 101 26/32.
Yields on 10-year notes slid earlier as much as three basis points to 3.33 percent, the lowest level since Jan. 31. Yields on 30-year bonds climbed five basis points to 4.55 percent after dropping yesterday as much as 11 basis points following the strongest demand at a government auction of the debt since 2000.
For the week, the 10-year note yield fell 9 basis points and the 30-year bond yield slid five basis points. Treasuries have returned 0.1 percent this year through March 10, according to a Bank of America Merrill Lynch index.
After initial demand for the safety of U.S. government debt, investors now expect many insurance companies will sell Treasuries to help pay earthquake claims, according to Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York.
“You have a situation where assets have to be sold to pay claims,” he said. “It’s going to take a swath of international buyers out of the equation.”
Japanese insurers in particular may sell Treasuries, their most liquid holdings, rather than Japanese government bonds before the end of the fiscal year on March 31, when companies typically repatriate funds, Franzese said.
The insurance industry may have to pay out about $10 billion in earthquake claims, according to James Shuck, a London-based insurance analyst at Jefferies Group Inc. That would make the disaster the second-most-costly temblor on record after the $15.3 billion Northridge, California, quake in 1994, according to data compiled by Swiss Re.
The Bank of Japan pledged to ensure financial stability after the earthquake forced Toyota Motor Corp. to shut some plants, knocked out oil refineries and sparked a plunge in stocks, with the Nikkei 225 Stock Average dropping 1.7 percent.
Even as investors focus on the possibility insurance companies may need to sell Treasuries, the BOJ may buy the debt to support exports by weakening the yen, according to Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New-York based brokerage for institutional investors.
“They’ll buy Treasuries and drive the exchange value of the yen down to stimulate the economy and help exports,” di Galoma said. “One of the problems in Japan is production facilities have been damaged, and they’re an export-driven economy. Things are going to slow down over there.”
Treasuries advanced this week as Libyan forces loyal to Muammar Qaddafi bombarded rebels in control of oil installations in Ras Lanuf after anti-regime forces said they would seek to secure energy fields and infrastructure.
Turmoil in the region helped push demand for 30-year bonds at yesterday’s $13 billion auction to the highest since August 2000. The government also sold $32 billion of three-year debt on March 8 and $21 billion of 10-year notes the next day for a total of $66 billion this week.
U.S. 10-year notes dropped earlier today after the Commerce Department reported that retail sales increased 1 percent in February after a 0.7 percent gain in the previous month. The advance matched the median forecast of 82 economists in a Bloomberg News survey.
“The data have been quite encouraging,” said Rohit Garg, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “Of course we all think the sell-off is going to be limited for various reasons, like geopolitical risk.”
Gross on Treasuries
Investors aren’t being compensated enough for owning U.S. Treasuries, said Pacific Investment Management Co.’s Bill Gross, who runs the world’s biggest bond fund, in an interview with Margaret Brennan on Bloomberg Television’s “InBusiness.”
Gross eliminated government-related debt from his main fund last month as the U.S. projected record budget deficits. Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009.
While the U.S. will retain its AAA credit rating for some time, yields on Treasuries are about 1.50 percentage points lower than they normally are, Gross said.
New York Fed President William Dudley said February’s increase in U.S. jobs gives him more confidence that January’s figures were damped by harsh weather and reiterated the labor market will pick up.
At the same time, Dudley reiterated his remarks from Feb. 28 that “sustained strong employment growth” is needed to assure the recovery, echoing recent comments from Fed Chairman Ben S. Bernanke.
The Fed is about halfway through with its plan to buy $600 billion of Treasuries through June under the second round of quantitative easing. The Fed expects to buy $18.5 billion to $25.5 billion of Treasuries next week.
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