Treasury 10-Year Notes Decline Most Since May on Recovery Bets
Oct. 31 (Bloomberg) -- Treasury 10-year notes fell inOctober for the first time in four months as investors bet theFederal Reserve may begin to signal an increase in interestrates from record lows as the economy shows signs of growth.
Thirty-year bonds fell the most since May as investors betthe Treasury will increase long-term debt sales as thegovernment seeks to lock in near record-low borrowing costs.The U.S. sold $201 billion of notes and bonds this month. TheFed meets next week to discuss monetary policy and the economicoutlook. The U.S. economy shed 175,000 jobs in October,according to the median of economists surveyed by Bloombergbefore a Labor Department report on Nov. 6.
“It’s people getting more comfortable with the Fed’sstance,” said Jason Brady, a managing director at ThornburgInvestment Management in Santa Fe, New Mexico, which oversees $4billion in fixed income. “If they believe that there’s a lot ofsupply, that’s going to hurt relatively longer-dated assets.”
The 10-year note yield rose eight basis points for themonth, or 0.08 percentage point, to 3.38 percent, according toBGCantor Market data. That’s the biggest increase in yield sinceMay. The 3.625 percent security due in August 2019 fell 22/32,or $6.88 per $1,000 face amount, to 102.
Thirty-year yields rose 18 basis points in October. The gapbetween 2- and 10-year notes widened the most on a monthly basissince May.
‘Heightened Uncertainty’
Returns on Treasury debt of all maturities fell in Octoberfor the first time since June, declining 0.6 percent throughOct. 29, according to Merrill Lynch & Co.’s U.S. Treasury MasterIndex. The securities have fallen 3.1 percent this year, and areheading for their worst performance since 1994 when they lost3.3 percent.
The yield on the two-year note, most sensitive to monetarypolicy, on Oct. 23 rose above 1 percent for the first time thismonth after Fed Bank of Philadelphia President Charles Plosseron Oct. 22 told Bloomberg Radio his “instinct is the time forraising rates will be before many of my colleagues” think itis. Central bankers will probably discuss at their Novembermeeting how and when to signal the possibility of raisinginterest rates, the Wall Street Journal reported on Oct. 24,without citing anyone.
“There’s heightened uncertainty on the next move,”George Goncalves, chief fixed-income rates strategist at CantorFitzgerald LP, one of the 18 primary dealers that trade directlywith the Fed, said on Oct. 23. “The front end of the curve isbecoming more volatile.”
Government Intrusion
Treasuries declined as reports added to evidence of aneconomic recovery. Industrial production in the U.S. rose morethan anticipated in September, the Fed said on Oct. 16, whilethe Fed Bank of New York said on Oct. 15 that its generaleconomic index soared to the highest since mid-2004.
The world’s largest economy expanded 3.5 percent from Julythrough September, propelled by emergency programs to boostbuying of cars and homes, after shrinking the previous fourquarters, a Commerce Department report showed Oct. 29.
The worst financial crisis since the Great Depression hasprompted the biggest government intrusion into the economy sinceWorld War II, and may have shaken companies and consumers somuch that their spending won’t be enough to replace federalsupport.
“The big question people are looking to have answered isif the economy will be able to free-stand on its own withoutgovernment intervention and fiscal stimulus,” said ThomasTucci, head of U.S. government bond trading at primary dealerRBC Capital Markets in New York.
‘Losing Faith’
U.S. debt pared losses as other reports signaled therecovery will be slow. Consumer spending fell 0.5 percent inSeptember after a 1.4 percent jump in August, CommerceDepartment figures showed yesterday. The Conference Board’sconfidence index dropped to 47.7 from a revised 53.4 inSeptember and a measure of employment availability slid to a 26-year low, a report showed on Oct. 27.
“People are losing faith in the economy,” Tom diGaloma, head of U.S. rates trading at Guggenheim Capital MarketsLLC, a New-York based brokerage for institutional investors,said on Oct. 27. “Jobs aren’t being created. They drive theconsumer. That’s having a very adverse impact.”
The unemployment rate rose to 9.9 percent in October,according to the median forecast of economists surveyed byBloomberg before the report on Nov. 6.
Debt Sales
The Treasury’s auctions this month brought its total salesof coupon securities in 2009 to $1.718 trillion, compared with$665 billion in the first 10 months of 2008.
This week’s offerings of two- and five-year debt drew thestrongest demand in two years, signaling the unprecedentedamount of debt being sold to finance the record budget deficitis not damping investor demand.
Sales of coupon-bearing Treasuries will increase to $2.38trillion in the fiscal year that began Oct. 1, from $1.81trillion in the prior 12 months, primary dealer Goldman SachsGroup Inc. said in a report on Oct. 20.
The U.S. plans to increase the average maturity of itsoutstanding debt, currently $7 trillion, to try to lock long-term borrowing costs that are low by historic standards.
The average maturity of U.S. government debt fell to a 26-year-low of 49 months in December as the government stepped upsales of short-term securities to meet immediate demand forcash. To meet its goal of increasing the average life to 72months the Treasury would have to sell $350 billion of 10-yearnotes and $250 billion in 30-year bonds, an increase of morethan 40 percent of the securities over this year’s levels.
Spent, Lent, Guaranteed
As a result of the reliance on short-term financing, nearlyone-fourth of outstanding public debt, $1.6 trillion, willmature within the next year, forcing the Treasury to raise moremoney, even as the Congressional Budget Office forecasts thedeficit will remain at $1.4 trillion.
The Fed completed its $300 billion Treasury purchaseprogram on Oct. 29, which it began in March as part of an effortto cap consumer borrowing costs.
“Some caution should be observed in the future as to whenthe Fed will look to ‘give back’ those bonds to the market,”Kevin Giddis, head of fixed-income sales, trading and researchat brokerage firm Morgan Keegan Inc. in Memphis, Tennessee,wrote yesterday in a note to clients yesterday. “For the nearterm, as long as the economy continues to sputter, job growth isnegative and price pressures remain subdued, it is hard to shedbonds in favor of anything else.”
The Fed and the U.S. government have spent, lent orguaranteed $11.6 trillion to spur the world’s biggest economyand thaw credit markets that froze last year.
To contact the reporter on this story:Daniel Kruger in New York at dkruger1@bloomberg.net.
Last Updated: October 31, 2009 00:01 EDTSource: Bloomberg
