High-yield/macroeconomics (fka YIELD)

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Treasury 10-Year Note Yield Falls to Record Low Before Fed

http://www.bloomberg.com/apps/news?pid=20601087&sid=ab53.OQgInOs&refer=home
By Lukanyo Mnyanda and Ron Harui

Dec. 16 (Bloomberg) ** Treasuries rose, pushing the yields on 10- and 30-year securities to record lows, on speculation the Federal Reserve will cut interest rates and announce plans to buy U.S. government debt.

The 10-year note’s yield dropped to 2.465 percent, the lowest level since the beginning of the Fed’s daily data in 1962, as investors sought the highest yields of the safest government securities. The notes yielded 176 basis points more than two-year debt, down from 253 basis points a month ago.

“We expect the Fed to go all the way to zero, and that will surprise the market,” said Axel Botte, a strategist in Paris at AXA Investment Managers, which has $800 billion in assets under management. The market may rally further, according to Botte.

The biggest financial crisis since the Great Depression is driving demand for the protection of government bonds, with yields on the three-month bills falling below zero last week for the first time. Financial institutions reported almost $1 trillion in writedowns and losses since the start of last year, pushing the largest economies into a recession.

The yield on the 10-year note fell three basis points, or 0.03 percent point, to 2.49 percent at 7:26 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 increased 7/32, or $2.19 per $1,000 face amount, to 111.

The 30-year bond’s yield was little changed after touching 2.936 percent, the lowest since regular sales of the security began in 1977. The five-year yield dropped one basis point to 1.47 percent. The three-month bill rate was at 0.04 percent.

Longer-Dated Bonds

Investors should buy longer-dated bonds, said Botte, who forecast the difference in yield, or spread, between two- and 10-year notes will narrow to about 140 basis points, without providing a specific time frame.

Government reports today may show consumer prices dropped in November by the most since records began six decades ago and homebuilding declined last month to the lowest level since data started in 1959. Treasury Secretary Henry Paulson said yesterday the U.S. economy is in a “fragile state right now.”

Key measures of market stress showed banks are still balking at lending, 16 months into the credit crunch. The Libor- OIS spread, a gauge of cash scarcity, was more than 19 times its average in the 12 months leading up to the start of the crisis in August 2007.

Treasury Returns

U.S. government bonds returned 12.7 percent this year, the most since they gained 13.4 percent in 2000, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Ten-year yields have fallen from this year’s high of 4.27 percent.

The spread between two- and 10-year notes narrowed after the Fed began a two-day meeting yesterday to consider whether to cut borrowing costs or pursue other measures to stimulate economic growth.

Futures contracts showed a 64 percent chance the central bank will cut its 1 percent target rate for overnight bank loans to 0.25 percent. The rest of the bets are for a half-percentage- point reduction.

“For the time being, we love Treasuries,” said Marc Fovinci, who helps invest $2.8 billion as head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon. “As the shorter end of the curve yields you nothing, you go further out looking for more yield.”

Paulson on Automakers

The Bush administration is moving with “deliberative speed” in considering possible financing for U.S. automakers, Paulson said yesterday in an interview on Fox News and Fox Business Network. General Motors Corp. and Chrysler LLC may be only weeks from insolvency, the companies said in congressional hearings this month. Paulson said the failure of an American carmaker might deal a severe blow to the U.S. economy.

Fed Chairman Ben S. Bernanke said in a Dec. 1 speech the central bank would consider buying longer-term government debt to prevent yields from rising. One option, Bernanke said, is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.” He said there was limited room to lower rates.

“What everyone is going to watch is what sort of clues they’re going to give for their next step, so-called quantitative easing,” Fovinci said. “Are they going to buy Treasuries? If the Fed expressively states that its next step is going to buy Treasuries in general, that’s obviously bullish.”

Consumer prices probably dropped 1.3 percent last month, the most since records began in 1947, according to a Bloomberg News survey. The Labor Department will release the report at 8:30 a.m. in Washington.

Housing Starts

New-home starts in November slid to a 736,000 annual pace, the lowest level since records began in 1959, a separate Bloomberg survey showed. The Commerce Department will release the data at 8:30 a.m. in Washington.

“Overall demand for the front end remains firm, which is likely to hold on over the coming weeks,” Wilson Chin, a fixed- income strategist in Amsterdam at ING Groep NV, wrote in an investor report today. With ING’s view that Fed funds will reach zero in 2009, “there’s still room for U.S. Treasuries to perform, though movements will remain volatile.”

The 10-year breakeven rate, the difference in yields between 10-year Treasury Inflation Protected Securities and comparable U.S. notes, was little changed at 0.11 percentage point, near the narrowest since Nov. 20.

Money-market rates showed banks’ reluctance to lend may be easing amid a global round of interest-rate reductions and cash injections. The difference between what banks and the U.S. government pay to borrow money for three months, the so-called TED spread, narrowed for a sixth day to 1.83 percentage points, the lowest level since Nov. 11, from 1.86 points yesterday.

Libor-OIS Spread

The Libor-OIS spread widened to 155 basis points today.
The gauge, which former Fed Chairman Alan Greenspan said in June should be used as an indicator of the health of credit markets, averaged 8 basis points in the year before the start of the credit crunch.

Gains in debt may be tempered after the Treasury said the U.S. federal budget deficits are “likely to remain elevated for some time” as costs for financial bailouts and economic stimulus exceeded $1 trillion for the first time, analysts said.

“Measures to boost the economy may spur hopes for a recovery and concerns over inflation,” said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan’s second-largest brokerage. “This may lead to higher long-term yields.”

Ten-year yields may rise to 3.3 percent and 30-year yields may increase to 3.8 percent by the end of March, Nagai said.

The Treasury’s annual report yesterday showed government spending exceeded revenue by $1.01 trillion in the 12 months to Sept. 30, compared with $276 billion a year earlier, under stricter accounting methods used to calculate the shortfall.