04 Mar 2009
March 4 (Bloomberg) -- Treasuries fell, extending the worst losses in five years, on speculation the U.S. will announce plans tomorrow to sell $60 billion of debt next week as it borrows record amounts to spur the economy.The "steady drumbeat of Treasury auctions" will send yields higher this year, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. Treasuries dropped even as global stock markets declined, raising concern that increasing supply is overwhelming demand for the relative safety of government debt.
"Supply is pushing yields higher," said Peter Jolly, head of market research at National Australia Bank Ltd.'s investment- banking unit in Sydney. "As stock markets are making lows, you would have thought that would send Treasury yields lower. I fear the supply concerns are gaining the upper hand."
The yield on the 10-year note rose six basis points to 2.94 percent as of 1:48 p.m. in Tokyo, according to data compiled by Bloomberg. The price of the 2.75 percent security due in February 2019 dropped 15/32, or $4.69 per $1,000 face amount, to 98 13/32. A basis point is 0.01 percentage point.
Ten-year yields will be between 2.75 percent and 3.25 percent for the next few months, Jolly said, increasing his target range by a quarter percentage point from last week.
Yields, which dropped to a record 2.04 percent on Dec. 18, have averaged 4.64 percent for the past decade.
The U.S. will probably sell a record $33 billion of three- year notes on March 10, $17 billion of 10-year debt on March 11 and $10 billion of 30-year bonds on March 12, according to Wrightson, a research unit of the world's largest inter-dealer broker. The auctions follow $94 billion of note sales last week.
Steepest Loss
Treasuries handed investors a loss of 3.6 percent in the first two months of 2009, the steepest decline since July 2003, when they fell 4.2 percent, according to Merrill Lynch & Co.'s U.S. Treasury Master index.
The yield on the benchmark 10-year yield has risen from 2.21 percent at the start of 2008, even though the MSCI World index has fallen 24 percent.
U.S. 10-year rates and the MSCI index have a correlation of 0.72 over the past year, according to data compiled by Bloomberg. A figure of 1 shows the two move in lockstep. The correlation is only 0.1 for the past month.
Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner said yesterday policy makers may increase aid to the banking system beyond the $700 billion already approved even at the cost of soaring fiscal deficits.
‘Calmer Place'
"At some point the financial landscape is going to be a calmer place and people are going to feel better about the financial markets, and that's going to take away the safe-haven buying," said Rupkey at Bank of Tokyo-Mitsubishi, part of Japan's largest lender. Ten-year yields may rise to 3.8 percent by year-end, he said in an interview yesterday.
Investors are already demanding more to hold the government's long-term debt.
The difference between two- and 10-year yields widened to 2.02 percentage points, near the most since November, from as low as 1.25 percentage points late last year.
A technical indicator some investors use to identify targets suggests the Treasury market sell off will pause.
The Fibonacci series of numbers indicates 10-year yields need to hold above 3.07 percent if they are to rise further, according to data compiled by Bloomberg. Yields approached that level twice in February and failed to break through each time.
Credit Markets
The figure is a 50 percent retracement of the decline in yield from 4.1 percent on Oct. 15 to the record low of 2.04 percent on Dec. 18. A move past one target in the series indicates the rate may fall or rise to another level.
A Bloomberg survey of banks and securities companies projects 10-year yields will fall to 2.64 percent by June 30.
Yields suggest the government and central bank have yet to restore credit markets to where they were before a rout that began in 2007 and got worse last year.
The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.01 percentage point from 4.64 percentage points in October. The gap averaged 0.27 percentage point from 2002 through 2006.
The London interbank offered rate, or Libor, for three- month dollar loans, rose to 1.27 percent as of yesterday from 1.08 percent on Jan. 14.
Average 30-year fixed mortgage rates climbed to 5.07 percent in the seven days ended Feb. 26 from 4.96 percent in the middle of January, according to loan-finance company Freddie Mac.
Financial Stability
Rates are more than 2 percentage points higher than 10-year Treasury yields, versus 1.74 percentage points five years ago.
"Without a reasonable degree of financial stability, a sustainable recovery will not occur," Bernanke told lawmakers yesterday. "Although progress has been made on the financial front since last fall, more needs to be done."
President Barack Obama's administration is seeking congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October.
"We're going to get a lot of Treasuries for a number of years," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. "That's in the back of everyone's mind," he said yesterday.
