Treasuries Fall, Stocks Erase Gain, Dollar Rises on Debt Concern
Treasuries slid, sending 30-year yields to the highest level since May, amid increased criticism of the Federal Reserve’s plan to stimulate growth and concern that a swelling U.S. deficit will lead to higher borrowing costs. U.S. stocks erased gains and the dollar rallied.
The 30-year Treasury yield climbed 13 basis points to 4.42 percent. The Standard & Poor’s 500 Index slipped 0.1 percent to 1,197.75, wiping out a gain of as much as 0.7 percent. The Dollar Index jumped to its highest level since Sept. 30. Irish 10-year bonds rose, narrowing the yield premium to German bunds to 540 basis points, amid speculation the European Union will provide a rescue. After the close of U.S. markets, S&P 500 futures lost 0.1 percent at 7 p.m. in New York and stocks rose in early trading in Japan and Australia.
Treasuries slid as a group of economists and former government officials urged the Fed to stop its program of bond purchases, known as quantitative easing, because it may spur inflation. The U.S. securities extended losses in the afternoon, and stocks turned lower, after Market News International reported that the lead analyst at Moody’s Investors Service said a permanent extension of President George W. Bush’s tax cuts would be a “definite negative” for the U.S. credit rating.
“The article on the evaluation of U.S. ratings spooked the market a bit,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 18 primary dealers that trade with the Fed. “It was an impetus for the last leg of the down trade,” he said. “It’s not a ringing endorsement of the first couple of rounds of QE. There are a lot of worries out there.”
Moody’s told Bloomberg News after financial markets closed that a permanent extension of tax cuts first enacted under the Bush administration won’t lead to a downgrade in the U.S. credit rating.
“We have a Aaa outlook for the U.S. that is stable and we are not contemplating changing anything anytime soon, that is the bottom line,” Steven Hess, senior credit officer at Moody’s in New York, said in an interview today.
Treasuries fell for a third day after a group including former Republican government officials and economists urged the Fed to halt purchases of government bonds because it may risk a surge in inflation. The letter was signed by 23 people including Cliff Asness, who runs AQR Capital Management LLC, Stanford University Professor John Taylor and Columbia University Professor Charles Calomiris.
“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” the group wrote in its “Open Letter to Ben Bernanke” to be published as advertisements this week in The Wall Street Journal and New York Times.
Earlier declines in bonds, and gains in stocks, also came after the Commerce Department said U.S. retail sales increased 1.2 percent last month, above the forecast of a 0.7 percent gain based on the median estimate of economists in a Bloomberg survey. Inventories at U.S. companies rose 0.9 percent in September, more than forecast, as companies stocked shelves ahead of the holidays. Sales rose 0.5 percent, led by retailers.
Ten-year note yields rose 17 basis points to 2.96 percent, a three-month high. The Fed bought $7.923 billion of Treasuries today as part of its quantitative easing program.
Fed Bank of Richmond President Jeffrey Lacker said the central bank may need to tighten monetary policy, even with an elevated U.S. unemployment rate, to avoid a surge in inflation.
Dow Pares Gain
The Dow Jones Industrial Average wiped out most of an 88- point rally, closing up 9.39 points, or 0.1 percent, to 11,201.97. Walt Disney Co. and Intel Corp. lost more than 1 percent for the biggest declines. Commodity producers led the S&P 500’s loss, with Freeport-McMoRan Copper & Gold Inc. and Exxon Mobil Corp. down at least 0.7 percent.
The early rally in stocks also followed takeovers in the industrial and technology industries. Bucyrus International Inc., a mining-equipment maker, jumped 29 percent as Caterpillar Inc. said it agreed to buy the company for about $8.6 billion, including net debt. EMC, the biggest maker of storage computers, agreed to purchase Isilon Systems Inc. for $2.25 billion to gain video-storage equipment. Isilon rallied 28 percent.
Global takeovers announced so far this year have totaled $1.78 trillion, up 18 percent from the same time last year, data compiled by Bloomberg show. The average deal premium has been 22 percent in 2010, the data show.
“The takeover deals that we’ve seen are showing high premiums,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “That alone tells me that there’s corporate confidence and that companies are undervalued. The absence of negative news out of Europe is also helpful today.”
Legg Mason Inc.’s Bill Miller said U.S. stocks may rise 15 percent in the next 12 months as the Fed continues efforts to boost asset prices and the economy.
“The Fed wants the stock market to go up, and they will do what’s necessary to get it to whatever level it takes for the wealth effect of higher stock prices to stimulate growth,” Miller wrote in a letter to shareholders released today.
General Motors Co.’s initial public offering and sales from four private equity-backed companies are leading the biggest week for U.S. IPOs since before the collapse of Lehman Brothers Holdings Inc. Ten companies plan to raise a combined $12.5 billion this week, the most since Visa Inc.’s $19.7 billion sale in March 2008, the largest IPO in U.S. history, data compiled by Bloomberg show. GM, 61 percent owned by the U.S. Treasury, may sell $10.6 billion of shares Nov. 17 to help repay its bailout.
Almost four stocks rose for each that fell in the Stoxx Europe 600 Index, which climbed 0.8 percent. Axa SA, France’s biggest insurer, and Australian asset manager AMP Ltd. bid at least A$13.3 billion ($13.1 billion) for Axa Asia Pacific Holdings Ltd. The French company gained 2.3 percent. MAN SE jumped 6.2 percent after Scania AB said it and MAN are “investigating” a possible combination related mainly to commercial vehicles.
The MSCI Asia Pacific Index fell 0.4 percent, extending its 1.6 percent drop on Nov. 12. Industrial & Commercial Bank of China Ltd. lost 1.8 percent in Hong Kong after the state-run China Real Estate Business newspaper said the biggest four banks won’t lend to property developers until next year, a report denied by an ICBC spokesman. The MSCI Emerging Markets Index slipped 0.6 percent.
The dollar appreciated against 13 of 16 major peers, rising 0.8 percent to $1.3587 per euro and strengthening 0.7 percent to 83.007 yen. The pound slipped 0.4 percent to $1.6054 after a Rightmove Plc report showed U.K. home sellers cut asking prices by the most since 2007 this month.
The cost of insuring against losses on European government bonds fell on speculation pressure from euro-region central bankers will force Ireland to accept an international bailout that would calm markets.
Credit-default swaps on Irish government debt fell for a third day, dropping 58.5 basis points to 488, the lowest level since Oct. 29, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 8.5 basis points to 160.
Irish Prime Minister Brian Cowen signaled that his government will discuss measures to help the Irish banking system with European finance ministers tomorrow as he resists pressure to ask for a bailout.
Crude oil was little changed at $84.86 a barrel in New York. Corn and soybeans rebounded as demand climbed from livestock producers, food manufacturers and fuel makers following price slumps last week. Corn futures for March delivery rose 3.8 percent to $5.69 a bushel in Chicago. Soybean futures for January delivery rose 1.4 percent to $12.865 a bushel.
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