Treasuries Set for Biggest Weekly Loss in Month Before Home Data

Treasuries headed for their biggest weekly decline in a month before a U.S. report forecast to show home sales increased in December, adding to signs the world’s largest economy is gaining momentum.

U.S. government securities are having their worst start to a year since 2003 after data yesterday showed employment and manufacturing improved, while declining yields at European debt sales stoked speculation the region’s crisis is easing. The Citi Macro Risk Index dropped to a five-month low of 0.601 yesterday, showing increased demand for higher-yielding assets.

“Domestic data has been reasonably good and that’s been a catalyst to the selloff in Treasuries,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Risk sentiment has been generally positive this week, which reduces the safe-haven bid, pushing yields higher.”

The benchmark 10-year yield was little changed at 1.98 percent at 6:41 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 traded at 100 5/32. The yield increased 12 basis points, or 0.12 percentage point, this week, the most since the five-day period ended Dec. 23.

The difference between two- and 10-year yields widened one basis point to 1.75 percentage points after reaching 1.76 percentage points, the most since Jan. 6. The spread was as narrow as 1.47 percentage points on Oct. 4.

Worst Since 2003

Treasuries have handed investors a 0.3 percent loss in 2012 as of yesterday, according to indexes compiled by Bank of America Merrill Lynch. U.S. corporate bonds returned 0.7 percent this year and German bunds fell 0.1 percent, the indexes show. The MSCI All Country World Index of stocks rose 5 percent.

U.S. home purchases increased 5.2 percent last month to a 4.65 million annual rate, the most since May 2010, according to economists surveyed by Bloomberg before the National Association of Realtors reports the figures today.

Initial jobless claims plunged to 352,000 in the week ended Jan. 14, the lowest level since April 2008, the Labor Department said yesterday. A Federal Reserve report on Jan. 18 showed factory output increased.

Treasuries rose earlier today as European stocks fell from a five-month high, spurring demand for safer assets. The Stoxx Europe 600 Index dropped 0.4 percent.

The World Bank said this week that the U.S. economy will expand 2.2 percent in 2012, while the euro area will contract 0.3 percent.


“The global economic outlook will remain challenged,” William O’Donnell, head U.S. government-bond strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc’s RBS Securities primary dealer unit, wrote in a note to clients. “We advocate that longer-term investors use back-ups to reload on longs,” or bets bonds will gain.

Most economists are advising the opposite. The 10-year yield will advance to 2.59 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

Ten-year rates will rise to 2.5 percent by Dec. 31, according to a report yesterday by RBC Capital Markets LLC, one of the 21 primary dealers that trade with the Fed.

“Weak but positive growth should allow rates to grind higher barring an increase in European stress,” according to the report by analysts including Michael Cloherty, the head of U.S. rates strategy in New York.

France, Spain

France and Spain sold 14.6 billion euros ($18.9 billion) of bonds yesterday, with funding costs in both nations falling in the first sale of medium- and long-term debt since Standard & Poor’s downgraded their credit ratings on Jan. 13.

Greece’s government and private creditors convene today for a third session of talks on how to reduce the nation’s debt and avert a collapse of the economy.

Yields indicate investors are becoming more willing to lend. The three-month London interbank offered rate for loans in dollars was at 0.561 percent yesterday, headed for a second weekly decline.

The difference between five-year swap rates and the yield on same maturity Treasuries shrank for a third week to 31.5 basis points. Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of demand for higher-yielding assets versus sovereign debt.

The Fed is seeking to keep longer-term borrowing costs capped by selling $400 billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.

The central bank is scheduled to buy as much as $2.75 billion of Treasuries due from 2036 to 2041 today as part of the program, according to the New York Fed’s website.

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