Thursday, August 28, 2008

Treasuries Fall After Auction, Faster-Than-Forecast GDP Growth

Treasuries Fall After Auction, Faster-Than-Forecast GDP Growth

By Dakin Campbell

Aug. 28 (Bloomberg) -- Treasuries fell after the U.S. sold $22 billion of debt and a government report showed gross domestic product grew faster than forecast, fueling speculation the Federal Reserve will raise interest rates.

U.S. government debt declined as the Standard & Poor's 500 Financials Index rose 3%, easing demand for the relative safety of the Treasury-backed debt. Traders reduced bets the Fed will remain on hold through the first quarter of next year.

``Today's data confirms our belief that bond yields are headed higher,'' said Ajay Rajadhyaksha, the head of fixed- income strategy at Barclays Capital in New York, one of 19 primary dealers that trade with the central bank. ``If you think about what the Fed seems to be banking on, it is that inflation will start moderating because the economy is weakening. The chances of that happening seem less likely.''

The yield on the five-year note rose 4 basis points, or 0.04 percentage point, to 3.05 percent at 2:17 p.m. in New York, after the government sold $22 billion of the maturity, according to BGCantor Market Data. The 3.375 percent security due in July 2013 fell 5/32, or $1.56 per $1,000 face amount, to 101 15/32. The yield on the two-year note advanced 3 basis points to 2.37 percent. Ten-year note yields were little changed at 3.78 percent.

The government's auction of five-year Treasury notes, the biggest sale of the maturity in more than five years, drew a yield of 3.129 percent, the lowest since March. The yield was higher than the 3.110 percent average forecast in a Bloomberg News survey of 10 bond-trading firms.

Weaker-Demand Signal

The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, fell to 2.14 from 2.46 at the last five-year auction, indicating weaker demand. Indirect bidders, a class of investors that includes foreign central banks, bought 29.8 percent of the amount sold, compared with an average of 25.2 percent this year.

The government sold a record $32 billion of two-year debt yesterday, drawing bids for 2.18 times the amount on offer.

``Today's results were weaker than the results of the two- year, which indicates some erosion in sentiment toward Treasuries between yesterday and today,'' said Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York.

Futures contracts on the Chicago Board of Trade show a 32 percent chance the Fed will hold its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point unchanged through the first quarter next year, down from 36 percent yesterday. Policy makers next meet Sept. 16.

`Grain of Salt'

Treasuries have returned 1.5 percent this month the largest one-month increase since January, according to Merrill Lynch & Co.'s U.S. Treasury Master Index. The gain came as the economy has shown signs of further softening and credit market turmoil. Yields on the 10-year note have fallen from a high of 4.17 percent reached on July 23, and are near a three-and-a-half month low.

The increase in yields today ``has to be taken with a grain of salt,'' said Francis Mustaro, who heads a group managing about $1 billion at J&W Seligman & Co. in New York. ``The trends are in place for stagnant growth and for improved inflation numbers.''

Mustaro said he expects lower yields and ``wouldn't be surprised'' if Treasuries declined 25 or 30 basis points in the coming months.

Gross domestic product increased at a revised annual rate of 3.3 percent in the second quarter, from an advance rate of 1.9 percent in the first quarter, the Commerce Department said today in Washington. The median forecast in a Bloomberg News survey of 78 economists was for a rise of 2.7 percent.

Initial jobless claims decreased to 425,000 in the week ended Aug. 23 from a revised 435,000 the prior week, the Labor Department said, matching the forecast in a Bloomberg survey.

German Bunds

The difference in yields between U.S. 10-year government notes and similar-maturity German bunds, a benchmark for European debt, was 39 basis points, after widening yesterday to 41, the most since Aug. 1. Bunds fell yesterday after European Central Bank policy makers Axel Weber and Lucas Papademos said rates may have to rise as the economy recovers.

Demand for U.S. Treasuries may be buoyed because money managers need bonds to match monthly changes in the benchmark indexes they use to gauge performance, said Tsutomu Komiya, an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan's second-largest brokerage.

New securities are added to bond market indexes each month. The Treasury issued 10- and 30-year debt in August.

``Demand from investors will increase'' as August comes to a close, said Komiya, who helps oversee the equivalent of $88.7 billion. Prices may decline in September, he said.

Agency Debt

Investors also may show a greater interest in Treasuries as they reduce their holdings of agency debt, notes sold by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Bank of China sold $4.6 billion of agency or agency mortgage-backed debt in July and August, according to a note to clients written by Andrew Brenner, co-head of structured products and emerging markets at MF Global Ltd. in New York, which cited the bank. MF Global is the world's largest broker of exchange-traded futures and options contracts.

Fannie Mae Chief Executive Daniel Mudd replaced three top deputies to restore investor confidence after record losses and a 90 percent drop in the shares, the Washington-based company said in a statement yesterday.

To contact the reporter on this story: Dakin Campbell in New York at

Last Updated: August 28, 2008 14:22 EDT


T. Rowland said...

It's good to see some positives come from the market right now as GDP rose higher than projected and jobless claims decreased in the last month. People need to see improvement and that is coming as yields on five year notes rose and it is projected that demand from investors will increase. Bond yields are also projected higher further brightening the investor confidence and with the shake-up of Freddie Mac, they are trying to restore investor confidence. I think all these things are good but, just as the article warned take them with a grain of salt because things could get worse before they get better. As for the economy weakening, its showing signs of life with GDP rising faster than expected which I have to think is a positive sign and probably partly due to other economies around the globe going stagnate. It just goes to show how important the U.S. economy is to the global economy. If the U.S. is not prospering, it is only a matter of time before that is felt around the globe.

Anonymous said...

Even though we see that the rates are falling, we have seen some positives coming from our market now. GDP has risen more than projected and jobless claims have also decreased. People need to believe in these claims and work with them. Bond yields rates are on the rise which is a good thing to regain the trust of many investors which would help our economy out drastically. With these gains throughout the economy, it shows that our economy has a little life left in it and at any second it could continually grow and prospers. On the other hand, we must be aware that it could drastically fall without any help from the people. We need to get these rates under control and get the US economy back to normal or atleast on its way back to normal.