Treasuries Gain as Earnings Renew Recovery Doubts
Treasuries advanced as investors sought the safety of government securities as lower-than- forecast results from global corporations cast doubt about the strength of the economic recovery.
Longer-maturity debt led the gains as the Standard & Poor’s 500 Index declined for the third time in four days after disappointing earnings from companies from 3M Co. to DuPont Co. Yields on benchmark 10-year notes climbed yesterday above the 200-day moving average of 1.805 percent, attracting buyers.
“We have a little bit of a technically driven rally in the Treasury market,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed income assets. “Earnings have also been pretty poor this morning. It looks like industrial earnings and the downward guidance from several companies are pretty disappointing.”
The U.S. 10-year note yield fell five basis points, or 0.05 percentage point, to 1.76 percent at 11:27 a.m. New York time, according to Bloomberg Bond Trader data. The 1.625 percent note due August 2022 gained 15/32, or $4.69 per $1,000 face amount, to 98 25/32. The all-time low rate was 1.38 percent set on July 25.
The yield touched 1.82 percent earlier, having reached 1.83 percent on Oct. 18, the highest since Sept. 18.
The U.S. is selling $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year notes on Oct. 25.
The Sept. 25 offering’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.6, down from 3.94 the previous month. The average ratio for the past 10 auctions was 3.73.
Indirect bidders, a class of investors that includes foreign central banks, bought 27.2 percent of the notes at the September sale after purchasing 22.3 percent at the August offering.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 17.5 percent of the notes at the last sale, compared with an average of 12.2 percent at the past 10.
“The backup in yields may bring back foreign buyers and make for a slightly above average auction,” George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of primary dealers that are required to bid at the auction, wrote in a note to clients. “However, yield levels are still not compelling by any means.”
Treasuries were also buoyed after Moody’s Investors Service cut the ratings of five Spanish regions late yesterday and the nation’s economy shrank for a fifth quarter, adding pressure on Prime Minister Mariano Rajoy to seek European aid. Spain’s 10-year bond yield rose 13 basis points to 5.62 percent.
“We are seeing risk-off markets and safe haven buying as global equities are down with global economic concern and uncertainties continuing,” said Larry Milstein, managing director in New York of government-debt trading at R.W.Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The Spanish situation underscores that there are still a lot of problems.”
The Federal Reserve is expected to reiterate the need for low borrowing costs at the end of a two-day policy meeting that starts today.
At its last meeting, which ended on Sept. 13, the Fed announced it will buy $40 billion of mortgage-backed securities a month to put downward pressure on borrowing costs. It also said it will probably keep its target for overnight borrowing between banks near zero at least through the middle of 2015.
All 21 primary dealers expect it to expand stimulus measures before year-end to include purchases of government securities, according to a survey of the bond traders last week by Bloomberg News.
The Fed is also swapping short-term Treasuries in its holdings for longer-term securities to cap yields as part of its efforts to spur the economy. The central bank sold $7.8 billion of Treasuries due from June 2015 to August 2015 today, according to the Fed Bank of New York’s website.
A report on Oct. 25 will show orders for durable goods increased by 7.5 percent last month, a separate survey predicts.
Moody’s, a week after deciding against cutting Spain’s credit-rating to below investment grade, lowered Catalonia and four other Spanish regions yesterday.
Spain’s gross domestic product shrank 0.4 percent from the previous three months, matching the contraction of the second quarter, the Bank of Spain said in Madrid today. That compares with a median forecast for a 0.7 percent drop in a Bloomberg News survey of 10 economists.
Treasuries have returned 1.5 percent in 2012, according to Bank of America Merrill Lynch indexes. Bonds in an index of U.S. investment-grade and high-yield debt rallied 11 percent.
Investors use swaps to exchange fixed and floating interest-rate obligations. The spread between the fixed component and the Treasury rate narrows as demand for higher- yielding assets increases.
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