By Anchalee Worrachate and Candice Zachariahs - Aug 31, 2010 5:10 PM GMT+0800
Treasuries rose, sending 10-year notes to their biggest monthly gain since the end of 2008, as stocks fell before reports this week that economists said will show employers cut jobs and manufacturing growth slowed.
Two-year yields were within five basis points of a record low before the Federal Reserve releases minutes of its last meeting, when it opted to buy securities to hold down borrowing costs. Mohamed A. El-Erian at Pacific Investment Management Co., which runs the world’s biggest bond fund, said yesterday that the U.S. economy faces headwinds. Reserve Bank of Australia Assistant Governor Guy Debelle today said there’s a risk of a double-dip recession in the U.S.
“Bonds are reflecting global concerns over the economy,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “In the short term, I don’t think these levels of yields will put buyers off given the market’s mindset. There is still scope for Treasuries to rally further.”
The yield on the benchmark 10-year note dropped 3 basis points to 2.51 percent as of 9:50 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 rose 7/32, or $2.19 per $1,000 face amount, to 101.
The MSCI Asia Pacific Index of shares declined 1.7 percent, snapping a three-day gain and helping increase demand for the relative safety of government debt. Europe’s Stoxx 600 index fell 1.1 percent.
The 10-year Treasury yield has declined 41 basis points this month, and it slid to 2.42 percent on Aug. 25, a 19-month low. The last time yields fell so much was December 2008.
Two-Year Yields
Treasuries underperformed their German and British counterparts this month, handing investors a 1.85 percent gain compared with 3.8 percent from German securities and 4.1 percent from gilts, according to indexes compiled by the European Federation of Financial Analysts Societies.
The two-year note yielded 0.50 percent. The rate has fallen five basis points this month and dropped to a record 0.4542 percent on Aug. 24. Ten-year yields may decline toward 2.25 percent over the next month, said Damien McColough, head of fixed-income research in Sydney at Westpac Banking Corp., Australian second-largest lender.
“There are strong and legitimate fears about the U.S. economy and the market is loath to put on risk-on type trades,” said McColough. “Bonds will keep getting the benefit of that until you see clear signs of an economic recovery.”
The Tempe, Arizona-based Institute for Supply Management may say tomorrow that U.S. factories expanded at the weakest pace in almost a year. The manufacturing gauge dropped in August to 52.8 from 55.5, according to a Bloomberg News survey. Employers cut 100,000 positions in August after trimming 131,000 jobs the previous month, according to a separate survey before the Labor Department’s payrolls report Sept. 3.
Lost Decade
A “lost decade” in U.S. employment reflects a change in structure for the nation’s labor market, El-Erian, chief executive officer at Pimco, said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene.
The actions of the Fed alone to boost the economy aren’t sufficient, given a “frozen” housing market, slow growth, high unemployment and significant debt, said El-Erian, who is also co-chief investment officer at Pimco.
“There’s a risk not only that we remain in the new normal -- which is muted growth and high unemployment -- for a while, but also that there’s a downside risk of something more sinister,” he said. Pimco has shifted to higher-quality assets in the search for yield, El-Erian said.
The Reserve Bank of Australia’s Debelle, speaking at a conference in Sydney, said “it’s a risk” that the world’s biggest economy may suffer a double-dip recession.
Fallen Too Far
Fed Chairman Ben S. Bernanke said Aug. 27 at a Jackson Hole, Wyoming, conference attended by global central bankers that growth during the past year has been “too slow” and unemployment “too high.”
Treasury bears say yields have fallen too far given the pace of economic growth.
“The economy still has problems,” said Kei Katayama, leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., which has the equivalent of $53.8 billion in assets. “The market is already discounting these problems. The yield is a bit too low.”
Shorter Duration
Daiwa SB, a unit of Japan’s second-largest brokerage, is keeping the duration of its Treasury holdings shorter than the benchmark it uses to gauge performance, Katayama said. Duration measures a portfolio’s sensitivity to changes in yield, and a smaller figure indicates a more bearish position.
The 10-year yield will advance to 3.01 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
The pace of growth will quicken to 2.5 percent in the third quarter from 1.6 percent in the previous three months, a separate Bloomberg survey showed.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for inflation known as the breakeven rate, was at 1.58 percentage points after touching a 15-month low of 1.47 percentage points on Aug. 25.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net;
From Bloomberg published on Aug 31, 2010 5:10 PM GMT+0800