22 Apr 2009
April 22 (Bloomberg) -- Treasuries rose, extending this week's gains, as U.S. equity futures slid before a government report that analysts said will show home prices fell in February.The U.S. economic recession will lead to deflation and push down Treasury yields, said Dominic Konstam, head of interest- rate strategy in New York at Credit Suisse Group AG. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, narrowed to 1.25 percentage points from 1.31 percentage points a month ago.
"People are seeking Treasuries for the safety they offer," said Kazuaki Oh'e, a Tokyo-based debt salesman at Canadian Imperial Bank of Commerce, Canada's fifth-biggest bank. "The economy likely bottomed out, but it probably won't recover quickly. It may still be struggling in six months."
The yield on the 10-year note declined three basis points to 2.88 percent as of 12:45 p.m. in Tokyo, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 advanced 7/32, or $2.19 per $1,000 face amount, to 98 29/32. A basis point is 0.01 percentage point.
Futures on the Standard & Poor's 500 Index expiring in June fell 0.5 percent. The MSCI Asia Pacific Index of regional shares trimmed gains to 0.2 percent after advancing as much as 0.6 percent earlier.
U.S. home prices dropped 0.7 percent in February, following a 1.7 percent advance the previous month, according to the median estimate in a Bloomberg News survey before the Federal Housing Finance Agency reports the figure today.
Deflation ‘Inevitable'
Treasury market "rates are going to stay lower and go lower," Credit Suisse's Konstam said yesterday on Bloomberg Radio. "Deflation is inevitable."
Yields may fall toward the record lows set last year, when the 10-year rate dropped to 2.04 percent on Dec. 18, he said.
The longest U.S. economic downturn since the 1930s is already cutting the cost of living. U.S. consumer prices fell 0.4 percent in March from a year earlier, according to the Labor Department, meaning 10-year notes yield 3.28 percent after accounting for costs in the economy. The last time the so-called real yield was so high was in 2006.
Treasury prices slid yesterday after the Federal Reserve's purchase of $7 billion of U.S. debt fell short of expectations.
Ten-year notes led the retreat after the Fed bought 26 percent of the securities offered by dealers, down from 34 percent at the previous acquisition of seven- to 10-year debt on March 25.
‘Disappointed'
"The market had been disappointed because they thought the Fed purchase would have been the same size as the last," said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the 16 primary dealers that trade with the central bank.
Yields indicate government and central bank efforts are thawing credit markets.
A measure of reluctance among banks to lend dropped to the lowest since before the collapse of Lehman Brothers Holdings Inc.
The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, narrowed to 91 basis points, the least since Sept. 12. Lehman filed for bankruptcy protection on Sept. 15, prompting the spread to widen to 3.66 percentage points on Oct. 10.
The London interbank offered rate, or Libor, for three- month dollar loans, dropped to 1.1 percent yesterday, a level not seen since January.
Company Bonds
U.S. company bonds yielded 7.05 percentage points more than Treasuries, narrowing from 7.98 percentage points a month ago, Merrill Lynch & Co.'s Corporate & High Yield Master index shows.
Government securities handed investors a loss of 2.4 percent so far in 2009, according to Merrill's U.S. Treasury Master index, as investors sought higher-yielding assets. The U.S. government, borrowing record amounts as it tries to spur growth, is scheduled to announce tomorrow how much it plans to raise in three auctions next week.
"There is a very strong concern about the huge supply," said Satoshi Okumoto, general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $58.2 billion in assets. "Yields will go up."
