Treasuries Snap Advance Before Data Reports on U.S. Service Industry, Jobs
Treasuries snapped a gain before a private report that analysts said will show the U.S. services industry, which makes up almost 90 percent of the economy, grew at almost the fastest pace in a year.
Treasuries have “considerable risk,” a report by Charles Schwab Corp. (SCHW) said. Analysts raised their year-end forecast for 10-year rates by four basis points last week to 2.52 percent, according to responses from banks and securities companies surveyed by Bloomberg, with the most recent forecasts given the heaviest weightings. It was the largest increase since Bloomberg began compiling the predictions in July 2011
“The U.S. economy is expanding,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “I don’t recommend longer-term U.S. Treasuries. I recommend riskier assets like equities and commodities.”
U.S. 10-year yields held at 1.98 percent at 8:19 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent security due February 2022 changed hands at 100 6/32. The yield fell five basis points, or 0.05 percentage points, on March 2.
The Institute for Supply Management’s U.S. non- manufacturing index was probably 56.2 in February, versus 56.8 the month before, according to a Bloomberg News survey of analysts before the report today. The January figure was the most since February 2011.
Employers probably added more than 200,000 workers for a third month in February, a separate survey showed before the Labor Department reports payroll data March 9. China pared its economic growth target to 7.5 percent from an 8 percent goal in place since 2005, Premier Wen Jiabao said in a speech today.
U.S. government securities have handed investors a 0.5 percent loss in the past month as of March 2, based on Bank of America Merrill Lynch indexes.
The MSCI All Country World Index (MXWD) of stocks returned 3.4 in the period. The Standard & Poor’s GSCI Spot Index of 24 commodities gained 7.1 percent.
“There’s considerable risk in long-term bonds, particularly Treasuries if and when rates rise,” Schwab, which is based in San Francisco and manages $199 billion, said in a report on its website March 2. “We don’t like them right now,” according to the note by Rob Williams, the director of income planning, and Kathy A. Jones, a fixed-income strategist.
Euro Debt Crisis
Nomura Securities International Inc., one of the 21 primary dealers that trade with the Federal Reserve, has a “medium-term target” of 2.40 percent for 10-year U.S. yields.
“Investors are likely to refocus on the resilient economic fundamentals of the U.S.,” according to a report last week by George Goncalves and Marcus Phua in New York.
Treasuries gained on March 2 on concern measures to increase lending in the euro region won’t be enough to boost economic growth, spurring demand for the safest assets.
The European Central Bank last week lent banks 529.5 billion euros ($698 billion) for three years. The European Union faces a test in its attempt to stem the euro region’s two-year debt crisis when Greece’s private creditors decide this week whether to sign off on the biggest sovereign-debt restructuring in history.
Demand for the relative safety of Treasuries is keeping the 10-year yield within about 32 basis points of the record low. It is about 1.90 percentage points less than the average over the past decade.
Investors from outside the U.S. increased holdings of the nation’s government debt by $1.84 trillion to $5 trillion since the Fed began its first round of Treasury purchases in May 2009. Foreigners hold 60.5 percent of the securities not held by the central bank, government data show.
“There are buyers that lurk everywhere,” said William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, another primary dealer, said in a telephone interview Feb. 29. “There’s plenty of cash out there that would love to get its hands on quality assets at a reasonable rate. The problem is, there’s not enough high-quality liquid bonds.”
German 10-year bunds are also benefiting from the flight to safety. The yield is about 18 basis points less than same- maturity Treasuries, the biggest difference since November.
The Fed is in the process of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap long-term borrowing costs under a program scheduled to end in June. The central bank plans to sell as much as $1.5 billion of debt due from July to January 2015 today, according to the Fed Bank of New York website.
Investors stuck to their bearish stance on Treasuries in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker. Ried’s index on the outlook through June rose to 44 for the seven days ended March 2 from 43 the week before. A figure below 50 shows investors expect U.S. government debt prices to decline.
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