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Treasuries Fall as G-20 Seeks to Counter World Economic Slump

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by Gavin Finch and Wes Goodman

2 Apr 09 | Bloomberg

Treasuries fell for the first time in four days as leaders of the Group of 20 nations gathered in London amid signs the U.S. may start to recover from the worst recession since World War II.

Notes also slid as stocks rallied, curtailing demand for the relative safety of government debt. Investors may require higher yields to keep buying Treasuries as President Barack Obama’s government borrows record amounts to try to snap the economic slump, Goldman Sachs Group Inc. said in a report.

“The strong tone in the equity markets is impacting on the demand for bonds,” said Elwin de Groot, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “There’s also the feeling out there that things may be beginning to bottom out. As long as the Federal Reserve is on the buying side we’re not going to see a large jump higher in yields though.”

The 10-year note yield rose five basis points to 2.70 percent as of 10:50 a.m. in London, according to BGCantor Market Data. The 2.75 percent security due in February 2019 fell 13/32, or $4.06 per $1,000 face amount, to 100 13/32.

The yield, which slid to a record low of 2.04 percent on Dec. 18, has averaged 4.25 percent for the past five years.

MSCI World Index of shares rallied 2 percent, while the Dow Jones Stoxx 600 Index, a benchmark for Europe, rose 3.8 percent. Futures on the Standard & Poor’s 500 Index advanced 2.1 percent.

G-20 Meeting

The Group of 20 summit convenes in London as reports indicate the global economic slowdown is easing. U.S. home sales rose in February, Chinese urban investment surged 26.5 percent in the first two months of the year, and German investor confidence in March reached its highest level since July 2007.

General Motors Corp. and Toyota Motor Corp. led the six biggest automakers in the U.S. yesterday in posting smaller March sales declines than analysts estimated.

The U.S. needs to borrow $3.25 trillion for the fiscal year ending Sept. 30, including sales to replace maturing securities, according to Goldman. Marketable federal debt rose to a record $6.01 trillion in February, according to the Treasury Department.

“Who’s gonna buy all that government debt,” Ed McKelvey, an economist for the company in New York, wrote in the report. “It’s a question we get asked all the time.” Goldman is one of the 16 primary dealers required to bid at government auctions.

Investors from abroad will purchase Treasuries as they seek safer assets, according to the report issued in the U.S. yesterday. Money market mutual funds, U.S. households and the Fed will also be buyers, the report also said.

Yields May Rise

“Yields might have to rise in order to induce some of these purchases, though the fact that yields have remained at historic lows while the Treasury has been borrowing heavily is itself testimony to the strong demand for Treasury securities,” McKelvey wrote in the report.

The Treasury Department is scheduled to announce today how much it plans to sell in 10-year inflation-protected securities on April 7. On April 6, the Treasury will give the sizes for a three-year sale on April 8 and a conventional 10-year auction the following day.

Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets, freeing up funds to revive lending, may be a boon for Pacific Investment Management Co.’s Bill Gross, who manages the world’s biggest bond fund.

Geithner’s Plans

The proposal may reward investors with 20 percent annual returns on “really toxic” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings. It may already be working as top-rated commercial-mortgage bonds rose 5.6 percent since March 20 to about 79 cents on the dollar on average, according to Merrill Lynch & Co. indexes.

Yields indicate government and central bank efforts are reviving debt markets, though trading hasn’t recovered to where it was before the credit crunch began in 2007.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 96 basis points from 2008’s high of 4.64 percentage points in October. The average for the past decade is 55 basis points.

‘Flight to Quality’

U.S. company bonds yielded 7.79 percentage points more than Treasuries, narrowing from 8.04 percentage points at the end of 2008, Merrill’s Corporate & High Yield Master index shows. The spread was 1.43 percentage points 24 months ago.

Bond bulls are betting the U.S. recession has further to go. A Labor Department report today will show the number of Americans claiming jobless benefits surpassed 600,000 for a ninth week, according to the median estimate in a Bloomberg News survey of economists. Figures tomorrow will show the jobless rate climbed to the most since 1983, a separate survey showed.

“Yields will fall because of the flight to quality,” said Shun Totani, senior fund investor for Tokyo-based Asahi Life Asset Management Co., which handles the equivalent of $1.27 billion in debt. “The employment situation is bad. Consumption may fall.”

Ten-year yields are set to slide to 2.5 percent in the next few months, said Totani, who increased his bet on Treasuries six months ago.

Reports yesterday showed unexpected increases in U.S. home sales and manufacturing, tempering optimism that the Fed’s buying of government securities will hold down yields.

Fed Purchases

The central bank purchased $6 billion of U.S. securities yesterday and is scheduled to buy notes maturing from September 2013 through February 2016 today. Its next purchases are scheduled for April 6, April 8, April 13, April 14 and April 16.

After subtracting for consumer prices, the so-called real yield is about 2.49 percent on 10-year notes, more than double the five-year average.

The spread between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects traders’ outlook for consumer prices, climbed to 1.35 percentage points from near zero at the end of 2008. It has averaged 2.26 percentage points for the past five years.

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Written by Editors

2 April 2009 at 6:51 am

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