Treasuries headed for their first monthly decline since October on speculation a European Central Bank allotment of loans today will bolster investor appetite for higher-yielding assets.
U.S. government securities handed investors a 0.5 percent loss in February as of yesterday, according to Bank of America Merrill Lynch indexes, dropping as the economy showed signs of improvement. Dan Fuss, vice chairman of Loomis Sayles & Co. in Boston, said he’s avoiding Treasuries because central bank purchases are keeping yields artificially low.
“The European problem will gradually be solved, and the U.S. economy is recovering,” said Tsutomu Komiya, who helps oversee the equivalent of $114.8 billion as an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan’s second-biggest brokerage. “The focus will shift from Europe to the U.S. That’s negative for Treasuries.”
Ten-year yields held at 1.94 percent today as of 7 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 changed hands at 100 18/32. The rate has climbed from 1.80 percent at the end of January.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened 17 basis points this month to 2.27 percentage points. The 10-year average is 2.14 percentage points.
Japan’s five-year yield fell 1/2 basis point to 0.29 percent, the least since Aug. 22.
‘Ridiculous’ Treasury Yields
The ECB may grant the region’s region banks 470 billion euros ($633 billion), making its second offering of three-year loans, according a Bloomberg News survey of analysts. The amount compares with 489 billion euros taken by banks at the last Long-Term Refinancing Operation on Dec. 21, which has helped increase liquidity in the European banking system.
Fuss, who is a member of the management team for the $21.1 billion Loomis Sayles Bond Fund, said he favors sovereign debt in Canada, Australia and New Zealand.
Treasury yields are so low that they’re “ridiculous,” he said yesterday on “The Hays Advantage” program on Bloomberg Radio. “You have people buying, specifically our own central bank, along with some of their friends offshore, and holding prices artificially high.”
The Federal Reserve is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap long-term borrowing costs under a program it plans to conclude in June. It is scheduled to buy as much as $2 billion of securities due from February 2036 to February 2042 today as part of the program, according to the Fed Bank of New York website.
Chairman Ben S. Bernanke is due to appear today before the House Financial Services Committee for his semi-annual testimony to explain the Fed’s monetary policy and the outlook for the economy.
At its meeting on Jan. 25, the Fed said subdued inflation and slack in the economy are likely to warrant keeping interest rates “exceptionally low” at least through late 2014.
Revisions to Treasury Department data on foreign holders of U.S. debt today will show an increase for China, the nation’s largest creditor, according to Bank of America Corp., whose Merrill Lynch unit is one of the 21 primary dealers that underwrite the U.S. debt.
China holdings were probably at least $200 billion greater than the $1.1 trillion reported for the end of last year, the company said in a note yesterday.
Annual revisions to the Treasury’s data on foreign holders of its debt have in recent years tended to reduce the amount credited for trading centers such as the U.K. and the Caribbean while increasing those of China. The Treasury’s initial reports on international purchases are based on the location where the transaction occurs. Revisions are based on location of the beneficial owner.
Ten-year yields that are within 30 basis points of the record low of 1.67 percent are signaling to some strategists that the U.S. economy is poised to weaken.
While the jobless rate has fallen to the lowest since February 2009 and the New York-based Conference Board said its gauge of consumer sentiment is the highest level in a year, some bond investors are focused on the potential for Europe’s sovereign-debt crisis to worsen and slow the global economy, for oil prices that exceed $100 a barrel to slow spending and on declining home prices.
“The market is telling you that the economy’s not strong enough to generate an inflationary spiral,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, another primary dealer, said yesterday in a telephone interview.
Strategists are lowering their yield forecasts. The median end of 2012 estimate for 10-year Treasury yields has fallen to 2.45 percent from 2.72 percent in November, according to a survey of more than 70 economists and strategists surveyed by Bloomberg News. Credit Suisse sees them at 2.25 percent.
A year-end rate of 2.49 percent would result in a 2.7 percent loss for an investor who bought today, according to data compiled by Bloomberg.