Treasuries Drop as UAE Support Curbs Dubai Concern (Correct)
Nov. 30 (Bloomberg) -- Treasuries fell, eroding the biggestmonthly gain since March, after the United Arab Emirates’central bank said it will back the state’s lenders as they facelosses from Dubai World’s possible default.
Ten-year notes slid for the first time in a week and Asianstocks gained the most in almost eight months after the AbuDhabi-based regulator said it will lend to banks at half apercentage point above the three-month local benchmark interestrate. It acted after Dubai World, a state-owned holding company,announced on Nov. 25 that it was seeking to delay loan payments.
“The moment of panic where people buy Treasuries haspassed,” said Luca Jellinek, a senior rates strategist inLondon at ANZ Banking Group Ltd. “Treasuries are not back wherethey were before this happened, so people are still de-riskinginto year end.”
The 10-year note yield increased 2 basis points to 3.22percent as of 8:53 a.m. in London, according to BGCantor MarketData. The 3.375 percent security maturing in November 2019 fell6/32, or $1.88 per $1,000 face amount, to 101 9/32.
Treasuries slid as the MSCI Asia Pacific Index of regionalshares rose 3.4 percent, the most since April 2.
Dubai World, with $59 billion of liabilities, said lastweek it would seek a standstill agreement with creditors and anextension of loan maturities until at least May 30.
The benchmark three-month Emirates interbank offered ratewas 1.941 percent, dropping from 4.31 percent at the end of2008, according to Bloomberg data.
Dubai Swaps
The cost of protecting Dubai government notes from defaultmore than doubled last week to 6.47 percentage points.
The swap contracts pay the buyer face value in exchange forthe underlying securities or the cash equivalent should acompany fail to adhere to its debt agreements. A basis point is0.01 percentage point and is equivalent to $1,000 a year on acontract protecting $10 million of debt.
Nakheel PJSC, the property company that is owned by DubaiWorld and wants to defer payment on its bonds, asked NasdaqDubai to suspend trading in the securities until it providesinformation to the market.
The dollar fell against 14 of its 16 major counterparts asinvestors sold the U.S. currency for higher-yielding assets.
Monthly Return
U.S. government securities returned 1.3 percent inNovember, according to Merrill Lynch & Co.’s U.S. TreasuryMaster index. It is the steepest gain since March, when theFederal Reserve began buying Treasuries to cap consumerborrowing costs, purchasing $300 billion of the securities bythe time the program ended in October.
Two-year yields rose two basis points today to 0.70percent. They fell to 0.61 percent on Nov. 27, one basis pointabove the record low set Dec. 17.
Treasuries gained this month as the Fed, under Chairman BenS. Bernanke, indicated it would hold its benchmark interest ratenear zero. Central bank statements on Nov. 4 and Nov. 24repeated the Fed’s view that it would keep the rate “for anextended period.”
The Fed reduced its target for overnight bank lending to arange of zero to 0.25 percent in December.
“Most members projected that over the next couple ofyears, the unemployment rate would remain quite elevated and thelevel of inflation would remain below rates consistent over thelonger run with the Federal Reserve’s objectives,” according tominutes of the Fed’s November meeting released Nov. 24.
Jobless Rate
The unemployment rate probably held at a 26-year high of10.2 percent in November, according to the median forecast in aBloomberg News survey of economists before the Labor Departmentreports the figure on Dec. 4.
The difference between rates on 10-year notes and TreasuryInflation Protected Securities, or TIPS, which reflects theoutlook among traders for consumer prices, narrowed to 2.10percentage points from 2.22 percentage points a week ago. Thefive-year average is 2.17 percentage points.
Even as the nation’s debt increased by $1.15 trillion thisyear to $6.95 trillion in October, the government’s interestexpense under Treasury Secretary Timothy Geithner dropped 15percent, the biggest decrease since before 1989, according todata compiled by Bloomberg.
Less than a week after deflecting calls for hisresignation, Geithner sold bonds on behalf of U.S. taxpayers atthe lowest yields on record in a show of confidence in hispolicies. The Treasury auctioned $44 billion of two-year notesNov. 23 at a yield of 0.802 percent, the lowest level on record.
Economic Growth
The economy will likely expand 2.6 percent in 2010, afterthe government and Fed lent, spent or committed almost $12trillion to keep financial markets from collapsing, according tothe median estimate of 63 analysts surveyed by Bloomberg. That’sin line with average growth of 2.63 percent from 2002 to 2007.
“There have been many criticisms of him, but he’s done agood job,” said Tsutomu Komiya, who invests in Treasuries forTokyo-based Daiwa Asset Management Co., which oversees $77billion in assets.
Yields will rise as the U.S. economy improves, Komiya said.
A survey of investors by Ried, Thunberg & Co. shows fundmanagers became more bearish on the outlook for Treasuries forthe rest of 2009.
The company’s index measuring investor sentiment towardgovernment debt fell to 46 for the seven days ended Nov. 25 from47 the previous week. A reading below 50 shows investors expectprices to fall. The economic analysis company based in JerseyCity, New Jersey, surveyed 27 fund managers controlling $1.41trillion.
To contact the reporters on this story:Wes Goodman in Singapore at wgoodman@bloomberg.net;Matthew Brown in London at mbrown42@bloomberg.net
Last Updated: November 30, 2009 03:58 ESTSource: Bloomberg
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