Treasuries fell, sending 10-year notes down for the first time in four days, before a government report economists said will show U.S. builders broke ground on homes at the fastest pace in eight months.
Yields climbed from the lowest level in almost four weeks on speculation today’s figures and an industry report later this week on existing home sales will show the U.S. recession is easing. Investors should unwind bets on a rally in longer- maturity Treasuries, according to a note to clients from JPMorgan Chase & Co., one of the 18 primary dealers that are required to bid at the government debt auctions.
“Yields will rebound,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank. “The U.S. economy is on the way to recovery, slowly.”
The yield on the 10-year note rose three basis points to 3.5 percent as of 7:21 a.m. in London, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 1/4 or $2.50 per $1,000 face amount, to 101 1/32.
Yields dropped to 3.46 percent yesterday, a level not seen since July 22, as a decline in stocks spurred investors toward the relative safety of U.S. debt.
MSCI’s Asia Pacific Index of regional shares dropped 0.3 percent, after yesterday’s 3.1 percent decline, the steepest since March 30. The Standard & Poor’s 500 Index sank 2.4 percent.
Housing Starts
Yields will climb to 3.79 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The figure may be as high as 3.7 percent within the next few weeks, Yamamoto said.
A Bloomberg News survey of economists showed housing starts rose 2.7 percent in July from June to an annual rate of 598,000. Existing home sales increased 2 percent, the surveys showed.
The “significant” decline in yield is reason to unwind bets on long-term Treasuries, JPMorgan analysts led by Srini Ramaswamy in New York wrote in their latest fixed-income weekly outlook.
A separate government report today will show producer prices fell in July, economists said, giving some investors reason to bet that inflation will stay in check.
‘Bullish on the Long End’
“We’re more bullish on the long end” of the range of maturities, said Shuhei Mochizuki, assistant manager in Tokyo at the foreign-bond section at Sumitomo Life Insurance Co., which oversees the equivalent of $31.2 billion in non-Japanese debt. “Inflation is not a concern.”
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.70 percentage points, near the least since July 15.
Ten-year notes offer a so-called real yield, or what investors get after inflation, of 5.60 percent, according to data compiled by Bloomberg. The rate was as high as 5.95 percent on Aug. 7, the most in more than two decades.
“We’re still in the throes of deflationary pressures,” said George Goncalves, chief fixed-income rate strategist in New York at Cantor Fitzgerald LP, one of the primary dealers.
The 10-year yield will fall to 2.9 percent by year-end, he said in an interview yesterday. Deflation is a drop in prices in the economy.
Fed Purchases
The Federal Reserve is scheduled to buy Treasuries maturing from February 2020 to February 2026 tomorrow as part of its plan to cap consumer borrowing costs, according to its Web site. It purchased $7.016 billion of Treasuries maturing December 2013 to March 2016 yesterday.
Yields indicate borrowing costs are falling.
U.S. 30-year fixed mortgage rates declined to 5.31 percent from this year’s high of 5.74 percent in June. They were as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.
The London interbank offered rate, or Libor, for three- month dollar loans was at 0.43 percent, near a record low.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.26 percentage point, the least since March 2007.
The Fed extended by three to six months an emergency program aimed at restarting credit markets yesterday, a move that may cushion the commercial real-estate industry from rising defaults and falling prices.
China Investment
The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said in a statement in Washington. For other asset-backed securities and CMBS sold before Jan. 1, the plan was extended three months to March 31.
Commercial property values have fallen 35 percent since peaking in October 2007, according to Moody’s Investors Service.
The financial crisis started with the collapse of the U.S. property market in 2007 and has triggered $1.6 trillion of writedowns and credit losses at banks and other financial institutions, sending the global economy into its first recession since World War II, according to data compiled by Bloomberg.
China Investment Corp., the nation’s sovereign wealth fund, declined to comment yesterday on a Reuters report that it was set to buy $2 billion of U.S. mortgages.
Commercial mortgage-backed securities have returned 21 percent so far this year, versus a 3.7 percent loss for Treasuries, according to indexes compiled by Merrill Lynch & Co.
Source : Bloomberg – 18 August 2009
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