Treasuries in Longest Winning Streak Since ’98 on Europe
Treasuries posted the longest streak of gains in more than 13 years, pushing 10-year yields close to a record low, as investors sought the safety of U.S. government securities while Europe’s debt crisis worsens.
U.S. debt rallied as Greece failed to form a government after elections May 6 gave no political party control of the legislature and as Moody’s Investors Service cut the credit ratings of 16 Spanish banks, citing economic weakness and the government’s mounting budget strain. The U.S. auctioned $13 billion of 10-year inflation-protected notes at a record negative yield and will sell $99 billion in notes next week.
“I can’t make the argument for rates to move up visibly higher from here because you still have all of these forces weighing on the whole U.S. rate structure,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney.
The 10-year yield fell 12 basis points this week, or 0.12 percentage point, to 1.72 percent in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 1 1/32, or $10.31 per $1,000 face amount, to 100 1/4.
The yield dropped to 1.6886 percent on May 17, approaching the record low 1.6714 percent set Sept. 23. The seven-year note reached a record low of 1.135 percent yesterday.
Treasuries gained for nine weeks through the week ended Oct. 2, 1998 as investors sought safety after a decline in the value of Asian currencies, a default by Russia on its sovereign debt and the collapse of hedge fund Long-Term Capital Management LP.
The 10-year note yield has fallen from 2.29 percent for the week ended March 16 to their current level, a 57 basis point decline. Treasuries have returned 3.2 percent including reinvested interest, for the period, according to Bank of America Merrill Lynch bond indexes, compared with a 7.8 percent decline for the Standard & Poor’s 500 stock index during the period.
Market participants are cutting their yield forecasts. The 10-year yield will be 2.48 percent by year-end, a Bloomberg survey of banks and securities companies shows. The projection declined from last month’s high of 2.58 percent.
Next week’s auctions will consist of $35 billion each of two-year and five-year securities and $29 billion of seven-year notes over three days starting May 22.
“Demand may be lower,” said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets. “They’re expensive. The economy in the U.S. is not so weak. It’s stable.” He trimmed his Treasury holdings May 17, he said.
The 10-year TIPS sale on May 17 drew a yield of negative 0.391 percent, compared with a forecast of negative 0.329 percent, according to a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers. The previous record was negative 0.089 percent on March 22.
Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending May 15, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 163,392 contracts on the Chicago Board of Trade. Net-short positions rose by 30,664 contracts, or 23 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
The U.S. economy will expand 2.3 percent this year, compared with 1.7 percent in 2011, a Bloomberg News survey of banks and securities companies shows. Euro-area gross domestic product will shrink 0.3 percent, versus last year’s 1.5 percent growth rate, according to the estimates.
Fed Bank of St. Louis President James Bullard said May 17 that economic reports this year have been stronger than forecast and he expects the central bank to raise its target interest rate by 2013. Bullard doesn’t vote on monetary policy this year.
“The fear trade lingers,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “There’s been a big spooking out” as investors have abandoned bets that longer-term yields will rise relative to those in the short term on speculation the Fed will extend or add to the accommodative policies already in place.
Central bank policy makers may find another round of Operation Twist is preferable to an outright asset-purchase program should the economy show further signs of weakness or if risks increase.
Chairman Ben S. Bernanke on April 25 said he was prepared to take further action to aid the economy if necessary, even as he signaled he didn’t see an immediate need to add stimulus with inflation near the Fed’s goal and unemployment falling. And the minutes from the Fed’s April meeting showed several policy makers said additional action could be necessary if the recovery slips.
Economists such as Nathan Sheets, global head of international economics at Citigroup Inc. and Credit Suisse Securities’ Dana Saporta said the Fed’s $400 billion program, known as Operation Twist, to extend the maturity of bonds has been just as effective as earlier programs to expand its balance sheet, known as quantitative easing.
Yields have tumbled this week in the highest-rated debt markets. German, two-, five-, 10- and 30-year yields all dropped to records yesterday as turmoil in Greece and Spain spurred demand for the safest government securities. Japanese government bond yields declined the lowest level since July 2003.
Moody’s cut the ratings of Spain’s biggest lenders including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) May 17. The move followed the company’s May 14 downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt. The main drivers for the bank downgrades were a surge in soured loans, the recession, restricted funding access and the reduced ability of the government to support lenders, Moody’s said.
The difference between two- and 10-year yields shrank to 1.39 percentage points May 17, the narrowest since December 2008. The spread widened yesterday to 1.43 percentage points.
The spread between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt, contracted to 2.04 percentage points May 17 from this year’s high of 2.45 percentage points in March.
“There’s a lot of uncertainty, and much of this uncertainty doesn’t get resolved for some period of time,” said Chris Ahrens, head interest-rate strategist in Stamford, Connecticut at UBS AG, one of the 21 primary dealers that trade with the Fed. “I don’t think anyone’s ready to plant a stake in the ground on the short side” and bet that rates will rise.
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