High-yield/macroeconomics (fka YIELD)

[Preciouslife1]

Treasuries Post Weekly Loss as Auctions Highlight Supply Issue

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiw3cE2FfsLU&refer=home
By Daniel Kruger

Dec. 27 (Bloomberg) ** Treasuries lost for the first week since October after U.S. sales of a record $66 billion of two- and five-year notes focused attention on the nation’s funding requirements amid a deepening recession.

The new securities drew historic low yields as the Treasury faces selling what it has estimated will be up to $2 trillion in debt this fiscal year. The U.S., strapped with a swelling budget deficit, needs to finance a bailout of the banking system and an economic stimulus plan that members of President-elect Barack Obama’s transition team said could cost $850 billion.

“It has to do with the amount of Treasuries that are coming out going forward,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc. “The question is where the demand is going to come from with these kinds of low yield levels.”

The yield on the 30-year bond rose six basis points, or 0.06 percentage point, to 2.61 percent, according to BGCantor Market Data. It was the yield’s first weekly increase since the five days ended Oct. 31. The yield touched 2.5090 percent on Dec. 18, the lowest since regular sales of the security began in 1977. The price of the 4.5 percent bond due in May 2038 tumbled 1 1/2, or $15 per $1,000 face amount, to 138 18/32.

The two-year note’s yield increased 15 basis points to 0.88 percent, its biggest jump since June. It touched 0.6044 percent on Dec. 17, the lowest since regular sales of the security began in 1975. The yield on the five-year note climbed 16 basis points to 1.51 percent. It touched 1.1852 percent on Dec. 17, the lowest since at least 1953, when records began.

‘Supply Overhang’

The difference between the yields of Treasuries maturing in two years and 10 years narrowed 14 basis points on the week to 1.25 percentage points, the least in six months, from 2.62 percentage points on Nov. 13.
The gap has shrunk as the Federal Reserve has said it will buy long-term fixed-income assets, possibly including Treasuries.

The Treasury auctioned $28 billion of five-year notes on Dec. 23 at a yield of 1.539 percent and $38 billion of two- year notes the previous day at a yield of 0.922 percent. Both were record lows.

The rising yields on Treasuries this week stemmed from “a little bit of supply overhang,” said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank. The two-year Treasury note, with a yield about 65 basis points above the upper end of the Fed’s target rate range of zero to 0.25 percent, “looks pretty cheap, given where funds are and given the problems we’re still facing.”

$2 Trillion

The U.S. said Dec. 10 it expects to sell between $1.5 trillion and $2 trillion in Treasuries in fiscal 2009. With the deepening slump and the “escalating size of the likely fiscal stimulus,” the size of the nation’s budget deficit is headed toward more than $1 trillion, Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients.

Measures of risk to the financial system eased. The TED spread, the difference between what the government and banks pay to borrow for three months, fell for a fourth week. It declined one basis point to 1.48 percentage points, down from a record high of 4.64 percentage points Oct. 10.

Trading volume was lighter than usual during the holiday week. Less than $18 billion in Treasuries changed hands yesterday, according to ICAP Plc, the world’s largest inter- dealer broker. That compares with the 10-day moving average of $135 billion.

‘Bullish for Treasuries’

The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to revised figures on Dec. 23 from the Commerce Department. Consumer spending fell the most in almost three decades.

Discounts by retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Including fuel, sales tumbled as much as 8 percent. One of the Fed’s preferred gauges showed inflation at the lowest level since 2004.

The SpendingPulse data service calculates its sales estimates based on MasterCard Inc. network transactions and adjusts for cash, checks and other payment forms. Purchase, N.Y.-based MasterCard is the world’s second-biggest credit-card company.

The core PCE index, a gauge of prices tied to consumer spending behavior, fell in November to 1.9 percent per year, a Commerce Department report showed on Dec. 24. That was the lowest since March 2004.

“It’s safe to assume there’s no great shockers in any of the negative data,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 17 primary dealers that trade with the Fed. “It’s bullish for Treasuries.”

U.S. government debt returned 14.3 percent in 2008, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index of stocks fell 41 percent, the worst year since 1931.