Treasuries Rise, Head for Weekly Gain Before Sentiment Report

Treasuries extended their third weekly gain before a report that economists said will show U.S. consumer confidence dropped this month, underscoring concern that the economic recovery is losing pace.

Ten-year yields set a record low this week as investors snapped up Treasuries on signs of slowing growth and a widening debt crisis in Europe, undeterred by Standard & Poor’s decision to downgrade the U.S. Bill Gross at Pacific Investment Management Co. said in a Twitter posting that investors should “be leery” of what he called “exuberance” that sent stocks up and bonds down yesterday. Ten-year Treasuries pared a bigger gain as U.S. stock futures reversed earlier losses.

“There’s uncertainty about growth prospects,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “There’s a correction after yesterday’s sell-off. In this world of uncertainty, Treasuries will continue to benefit.”

Ten-year yields declined five basis points to 2.30 percent as of 7:36 a.m. in New York, according to Bloomberg Bond Trader prices. They declined as much as 10 basis points earlier. The 2.125 percent note maturing in August 2021 rose 13/32, or $4.06 per $1,000 face amount, to 98 16/32. The record low was 2.0346 percent set Aug. 9.

Thirty-year yields dropped one basis point to 3.76 percent. Two-year yields were little changed at 0.19 percent.

Sentiment Index

Treasuries have handed investors a gain of 6.4 percent so far this year, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1 percent, while German bunds have advanced 4.6 percent, the indexes show.

Treasury 10-year yields headed for a weekly loss of 29 basis points, the biggest drop since the five days ending Dec. 19, 2008.

“There’s a significant re-pricing in the Treasury market,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. Yields are “reflecting growth concerns.”

U.S. two-year yields slid to 0.1568 percent on Aug. 9, the least ever. The rate is about three basis points more than for similar maturities in Japan, the smallest spread since 1992.

The Thomson Reuters/University of Michigan sentiment index probably dropped to 62 in August from 63.7 in July, according to the median forecast in a Bloomberg News survey of analysts. The last time the figure was so low was March 2009, when U.S. gross domestic product was shrinking. A separate report will show retail sales climbed in July, another survey indicates.

Short Sale

France, Spain, Italy and Belgium plan to impose bans on short-selling today to stabilize markets. The European Central Bank is buying Italian and Spanish government bonds to counter a surge in yields.

France’s economy unexpectedly stalled in the second quarter, data showed today. Gross domestic product was unchanged from the first quarter, when it increased 0.9 percent. Economists forecast a 0.3 percent gain, the median of 15 estimates in a Bloomberg News survey showed.

“Data out of Europe may be having an impact on the market,” Purps said.

The rally in Treasuries was interrupted yesterday as the Standard & Poor’s 500 Index surged 4.6 percent.

“Not to rain on your parade but be leery” of the “exuberance,” wrote Gross, who runs the world’s biggest bond fund for Pimco in Newport Beach, California.

Paulson Stance

Former Treasury Secretary Henry Paulson said he would invest in U.S. government securities before other sovereign debt even though the nation’s political process isn’t working at a “AAA level.”

“Our political process, our government, hasn’t been working at a AAA level,” Paulson, 65, said yesterday. “I would take U.S. Treasuries over other sovereign debt, other AAA sovereign debt, any day of the week. That’s not to say we don’t have important issues to deal with in this country.”

The Federal Reserve responded to the slowdown in growth by announcing on Aug. 9 that it plans to keep its benchmark interest rate at a record low through the middle of 2013.

Bond bears say growth isn’t slowing enough to keep yields at record lows.

“Treasuries are overbought,” said Takuya Yamamoto, a portfolio manager in Tokyo at Diam Co., which handles the equivalent of $129 billion and is a unit of Dai-Ichi Life Insurance Co., Japan’s second-biggest life insurer. “I expect yields to rise.”

‘More Patience’

Investors who expect the Fed to arrange a third round of bond purchases to support growth will probably be disappointed, Anshul Pradhan, a debt strategist at Barclays Capital Inc. in New York, wrote in a report yesterday. The central bank’s announcement said it still expects the recovery to pick up, according to Barclays, one of the 20 primary dealers authorized to trade directly with the central bank.

“The Fed is likely to show more patience than what the market expects,” Pradhan wrote. “We recommend positioning for unwinds of some of the recent moves.” The 10-year yield will rise to 3.25 by year-end, the report said.

Results of this week’s Treasury auctions show investors are lining up for the securities.

The Treasury Department paid an average yield of 2.13 percent on the three-, 10- and 30-year securities, less than the previous refunding auctions in May of 3 percent and below the former record of 2.59 percent in February 2009, according to data compiled by Bloomberg. The government began selling 30-year bonds on a regular schedule in 1977 as part of its so-called quarterly refunding.

“We’ve joined the crowd buying Treasuries,” said Wan-Chong Kung, a bond fund manager in Minneapolis at Nuveen Asset Management, which oversees more than $100 billion. “We recognize the heightened uncertainty and risk-off environment. The growth outlook has dimmed.”

S&P cut its rating on the U.S. by one level on Aug. 5. Moody’s Investors Service and Fitch Ratings have affirmed their AAA grades.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE