Treasuries Fall, Erode Weekly Gain, on Speculation Retail Sales Increased

Treasuries fell, eroding a weekly advance, as economists said a government report today will show retail sales rose in February by the most since October.

Bonds snapped a two-day advance after crude oil had its steepest loss in a month, easing concern that protests in the Middle East will send fuel costs higher and slow economic growth. U.S. retail sales increased 1 percent, following a 0.3 percent gain in January, according to the median forecast in a Bloomberg News survey of economists before the report.

“The market may get knocked back a little bit,” said Colin Embree, Singapore-based head of fixed-income trading and sales at Bank of Nova Scotia Asia Ltd., a unit of Canada’s third-largest lender. “We’ll be reminded today that the economy is improving.”

Ten-year yields climbed three basis points to 3.39 percent as of 1:22 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent note maturing in February 2021 declined 7/32, or $2.19 per $1,000 face amount, to 101 31/32.

Yields will rise to 3.93 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Crude oil for April delivery traded at $102.58 a barrel, after rising to $106.95 a barrel on March 7, the highest level since September 2008. It dropped 1.6 percent yesterday, the biggest decline since Feb. 7.

China Inflation, Output

Separate reports in the U.S. today will show business inventories rose and consumer sentiment declined, the Bloomberg surveys show. Sales at Macy’s Inc., the second-largest U.S. department store chain, and Limited Brands Inc., which owns the Victoria’s Secret clothing stores, beat analysts’ estimates in February, data showed this month.

China reported consumer prices and industrial production figures that beat expectations among economists surveyed by Bloomberg.

Treasuries gained this month as violence in Libya spurred demand for the relative safety of government debt.

U.S. securities have returned 0.2 percent in March, based on Bank of America Merrill Lynch data. The MSCI All Country World Index of stocks dropped 2.3 percent in the period, after accounting for reinvested dividends.

Muammar Qaddafi’s son, Saif al-Islam Qaddafi, said government forces are mounting an attack on rebels. Demonstrators in Saudi Arabia are advocating a “Day of Rage” today.

Higher Auction Demand

“Treasury yields will decline,” said Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, which oversees the equivalent of $42.2 billion and is a unit of Japan’s second-largest bank. “There’s a risk this will spread to China or other emerging markets, and that’s driving a flight to quality globally.”

Ten-year yields will fall to 2.8 percent by the middle of the year, Nakamura said.

Demand rose at three Treasury auctions this week. Investors submitted orders for 3.02 times the amount of debt offered at a 30-year sale yesterday, the most since 2000.

Bidding totaled 3.32 times the amount of available debt at a 10-year sale March 9, and the figure was 3.22 times at a three-year auction March 8, both more than the average.

“Investors have swung back to being bullish,” analysts at Morgan Stanley & Co. led by Jim Caron, the head of global interest-rate strategy, wrote in a report yesterday. “This week’s strong auctions are evidence,” according to the New York-based company, one of the 20 primary dealers that underwrite the U.S. debt.

Yield Spreads

Rates on 10-year notes dropped to a five-week low of 3.36 yesterday. The extra yield that investors get for buying the securities in the U.S. instead of Japan narrowed to 2.07 percentage points yesterday, the least since December.

The TED spread, the difference between what banks and the U.S. government pay to borrow for three months, widened to 24 basis points today, the most in seven months.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., told PBS this week that yields are too low. His $237 billion Total Return Fund held no government-related debt as of Feb. 28, according to a report on the Pimco website.

Wall Street banks are among those cutting their holdings of Treasuries. The 20 primary dealers reported that holdings of U.S. government debt tumbled to a net short position of negative $7.47 billion as of March 2, the Fed reported yesterday. It was the biggest short, or bet against Treasuries, in a year.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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