Monday, June 1, 2009

We would only consider buying Treasuries if 10-year yields come to around 4 percent,

TO BE NOTED: From Bloomberg:

"Treasuries Decrease as Gains in Stocks, Oil Damp Haven Appeal

By Dakin Campbell and Gavin Finch

June 1 (Bloomberg) -- Treasuries fell for the first time in three days as stocks and commodities gained on signs that the recession is abating, damping demand for the safety of government debt and stoking concern inflation could increase.

Ten- and 30-year securities hit their lows of the day after reports showed U.S. manufacturing shrank in May at the slowest pace in eight months and spending on construction unexpectedly rose in April. The difference between two- and 10-year yields widened to 2.67 percentage points, approaching the record 2.76 percentage points set on May 27.

“The personal income number was much stronger than expected,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The debate has turned to inflation.”

The yield on the benchmark 10-year note rose 16 basis points, or 0.16 percentage points, to 3.63 percent as of 10:53 a.m. in New York, according to BGCantor Market Data. The 3.125 percent security due in May 2019 dropped 1 10/32, or $13.13 per $1,000 face value, to 95 26/32. The yield on the 30-year bond climbed 14 basis points to 4.49 percent.

The Standard & Poor’s 500 Index gained 2.5 percent.

Ten-year yields have risen more than 160 basis points since falling to a record low of 2.03 percent last year.

Stocks Gain

Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, is up rose to 165.4 on May 29, up from this year’s low of 105.6 reached April 15.

U.S. debt handed investors a 4.3 percent loss this year, on course for the first annual drop since 1999, according to Merrill Lynch & Co.’s Treasury Master Index, as record government borrowing and signs the worst of the recession has passed dented demand. German bunds fell 1.3 percent and Japanese bonds dropped 1.2 percent.

Treasuries tumbled as stocks rallied after a Chinese report showed manufacturing expanded for a third month, adding to evidence the world’s third-largest economy is recovering from its deepest slump in almost a decade.

“Equities are higher and we are seeing our market come off as a result,” said Martin Mitchell, head of government-bond trading at the Baltimore unit of Stifel Nicolaus & Co.

The dollar dropped against all but two of the 16 most- traded currencies. Crude oil for July delivery rose as much as 3 percent to $68.29 a barrel on the New York Mercantile Exchange, the highest level since Nov. 10.

Consumer Spending

U.S. consumer spending fell 0.1 percent in April, smaller than forecast, Commerce Department figures showed in Washington. Incomes rose 0.5 percent, the biggest gain in almost a year, reflecting increases in unemployment insurance benefits and social security payments. The Federal Reserve’s preferred measure of inflation, which excludes food and fuel, increased 0.3 percent, after a 0.2 percent increase a month before, and was up 1.9 percent from a year earlier.

Spending on construction in the U.S. rose 0.8 percent in April, the biggest gain since August, Commerce Department figures showed in Washington.

Manufacturing in the U.S. shrank in May at the slowest pace in eight months. The Institute for Supply Management’s factory index rose to 42.8 from 40.1 in April, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.

Inflation Expectations

Inflation expectations have picked up. The difference in yield between Treasury Inflation-Protected Securities, or TIPS, due in 10 years and nominal treasuries of the same maturity was at 1.84 percentage points, up from this year’s low of 0.05 percentage points Jan. 2.

“The risks to higher yields are the recovery of the U.S. economy and the debt issue in the future,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank.

Investors remained bearish on the outlook for U.S. government securities through December, a Ried, Thunberg & Co. survey showed.

The company’s long-term sentiment index fell to 42 for the seven days ended May 29, from 43 the week before. A reading below 50 means investors expect bond prices to fall. The New Jersey-based economic analysis firm surveyed 25 investors with $1.2 trillion of assets.

Yield Risk

“We would only consider buying Treasuries if 10-year yields come to around 4 percent,” said Shuhei Mochizuki, assistant manager in the foreign-bond section in Tokyo at Sumitomo Life Insurance Co., which oversees about $30.7 billion in non-Japanese debt. “We prefer European bonds for now.”

Declines in Treasuries may be limited as the U.S. pauses in its debt sales this week. Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at the Treasury’s debt auctions, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008.

The U.S. budget deficit is projected to reach a record $1.75 trillion for the fiscal year ending Sept. 30, according to the Congressional Budget Office. It will surge to 12.2 percent this year, from 5.9 percent in 2008, according to the median forecast in another Bloomberg survey.

Treasury Secretary Timothy Geithner said today in China, the biggest holder of U.S. debt, that President Barack Obama plans to cut the budget deficit to “roughly 3 percent.”

‘Different Visit’

“No one is going to be more concerned about future deficits than we are,” Geithner told reporters on the way to two days of meetings that start today in China’s capital. Geithner is meeting Premier Wen Jiabao and other officials to assure the biggest holder of U.S. government debt that its assets are safe.

The U.S. will sell three-, 10- and 30-year securities next week after raising $101 billion from debt sales last week. The offerings may total $65 billion, according to an estimate by Wrightson ICAP LLC. The government has raised $720 billion in new cash this year.

The Federal Reserve, which has purchased $130.5 billion of Treasury debt this year in an attempt to lower consumer borrowing costs, is scheduled to buy securities due in 2016 to 2019 on June 3 and 2011-2012 notes the next day.

Some Fed officials judged the central bank may need to step up its asset purchases to secure a stronger economic recovery, according to minutes of the April 28-29 Federal Open Market Committee meeting released on May 20.

To contact the reporters on this story: Dakin Campbell in New York at; Gavin Finch in London at"

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