Treasury Yields at Almost 2011 Lows on Concern Economic Recovery Is Weak
May 16 (Bloomberg) -- Carl Lantz, head of interest-rate strategy at Credit Suisse Securities, discusses the outlook for U.S. Treasuries and negotiations over extending the U.S. government’s borrowing authority. Lantz speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Treasury yields were at almost their lowest levels this year amid concern about the strength of the recovery as Federal Reserve Bank of Atlanta President Dennis Lockhart said it’s too early to consider an exit from stimulus.
U.S. bonds rose before an industry report that economists said will show confidence among homebuilders is at recession levels. Lockhart, speaking yesterday, said bonds indicate traders are cutting bets on inflation.
“We’ve seen quite a series of weaker data prints, or data coming in not as strong as expected, and the market’s taken this as a signal that the recovery isn’t on its way as everyone expected going into the year,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “That’s the main driver why we’ve seen this fall in yields.”
Ten-year yields were little changed at 3.18 percent at 9:05 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 dropped 2/32, or 63 cents per $1,000 face amount, to 99 17/32. The yield fell to 3.13 percent on May 13, the lowest since December.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, narrowed to a 12-week low of 2.32 percentage points on May 13 and was at 2.38 percentage points today.
Manufacturing in the New York region expanded at a slower pace than anticipated in May as the cost of raw materials surged.
New York Manufacturing
The New York Fed’s general economic index fell to 11.9 from a one-year high of 21.7 in April. Economists in a Bloomberg News survey projected it would drop to 19.6, according to the median forecast. Readings greater than zero signal gains in the so- called Empire State Index that covers New York, northern New Jersey and southern Connecticut.
The National Association of Home Builders/Wells Fargo sentiment index was 17 this month from 16 in April, according to the median forecast in a Bloomberg News survey of economists before the figure is released today. Numbers below 50 signal more respondents view conditions as poor.
“The financial crisis and then the economic crisis kicked off in the housing market, and given that there are still no signals that things are really getting better, this is impacting sentiment,” Leister said.
Global demand for U.S. stocks, bonds and other financial assets weakened in March from a month earlier as China trimmed its holdings of government securities, the Treasury Department reported.
Investment Flows
Net buying of long-term equities, notes and bonds totaled $24 billion during the month compared with net buying of $27.2 billion in February, according to statistics issued today in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $116 billion compared with net buying of $95.6 billion the previous month.
Yields declined earlier after President Barack Obama said on CBS’s “Face the Nation” in a segment taped May 11 in Washington for broadcast yesterday that failure to raise the U.S. debt ceiling might disrupt the global financial system. Obama is reaching out to Republican and Democratic lawmakers to win approval of an increase in the debt ceiling after the government projected this month that the $14.3 trillion limit will be reached today.
“Nobody thinks this threat is credible that the U.S. would default,” said Carl Lantz, Credit Suisse Group AG head of interest-rate strategy in New York. “The reality is that no U.S. Treasury Secretary will let the U.S. government default on his watch so all that happens now is that supply of Treasuries comes down one way or another.” He spoke on Bloomberg Television’s “Inside Track” with Erik Schatzker.
Outlook for Yields
Ten-year yields will climb to 3.81 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. The projection dropped from 3.91 last week.
The Fed plans to buy $1 billion to $2 billion of TIPS due from April 2013 to February 2041 today under its plan to spur the economy, according to its website. The central bank said in November it would buy $600 billion of Treasuries by June 30.
Pacific Investment Management Co., which runs the world’s biggest bond fund from Newport Beach, California, is avoiding Treasuries, said Mohamed A. El-Erian, the co-chief investment officer, according to an interview published yesterday on the USA Today website.
‘Biggest Buyer’
“When the biggest buyer disappears and you cannot identify another buyer, it’s better to look for value elsewhere,” he said. Pimco’s record $240.7 billion Total Return Fund had bets against U.S. government and related debt in March and April, according to figures on its website.
Fed Chairman Ben S. Bernanke said last month he’s in no rush to increase interest rates, and he will keep reinvesting proceeds of maturing debt held by the central bank into bonds.
The Fed’s Lockhart said winding down the stimulus measures is a process that’s likely to begin only when the recovery becomes “more clearly sustainable.”
“Even if they are a bit premature in my view, questions are already arising about the specifics of the Fed’s exit strategy,” Lockhart said yesterday in a speech in Atlanta. A change in the Fed’s public statements “would actually start the process” of tightening, he said.
“Following the breach of the prior 3.25 percent range ‘floor,’ the market has been threatening a push down into the psychologically key 3 percent zone for some time now,” wrote strategists led by Charles Diebel at Lloyds Bank Corporate Markets, in an e-mailed report today. “With supply out of the way and a Fed seemingly on hold for a still ‘extended’ period, any further faltering in the risk on trade would likely generate additional momentum to the downside in yield terms.”
Saving the Euro
Treasuries are outperforming bunds as Chancellor Angela Merkel’s determination to save the euro rattles debt holders.
German 10-year yields rose to almost eight basis points more than similar-maturity Treasuries on May 4 amid concern Merkel’s 142 billion euro ($200 billion) bill for aiding Greece and Ireland will make the country’s debt riskier. As recently as January, bunds yielded about 53 basis points, or 0.53 percentage point, less than U.S. debt.
Europe’s benchmark bonds reflect the European Union’s rising budget deficits and the growing gap between inflation in the region and the U.S. European finance ministers meet today to discuss more support to help Greece avoid restructuring its debt after a 110 billion-euro bailout last year failed to keep the crisis from spreading to Ireland and Portugal.
The increase in German yields has driven down prices, resulting in a loss to investors of 0.6 percent this year, while Treasuries returned 1.7 percent, according to Bank of America Merrill Lynch data.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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