Bond Yields Keep Rising
June 11th, 2009Via: Bloomberg:
Treasuries gained as the highest yield on a 30-year U.S. bond auction in almost two years attracted investors concerned that record government spending and debt sales will lead to inflation.
“Treasuries have backed up enough that they offer respectable value,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc., the world’s largest broker of exchange-traded futures.
The bonds drew a yield of 4.72 percent at the auction, the highest since August 2007. Benchmark 10-year note yields reached 4 percent earlier for the first time since October on concern the budget deficit and a falling dollar will prompt investors to reduce holdings of U.S. debt.
The yield on the 10-year note fell nine basis points, or 0.09 percentage point, to 3.86 percent, after climbing as high as 4.0038 percent, at 1:03 p.m. in New York, according to BGCantor Market Data. The yield last touched 4 percent on Oct. 16. The 3.125 percent security maturing in May 2019 rose 23/32, or $7.19 per $1,000 face amount, to 93 31/32.
Eight bond-trading firms surveyed by Bloomberg News had forecast a yield of 4.80 percent. The sale is a reopening of the $14 billion 30-year bond auction on May 7, which drew a yield of 4.288 percent.
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Treasuries tumbled 6.5 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion and raising the risk of inflation. Ten-year notes rose as the highest yields in seven months lured investors.
“Clearly the supply issue is having a far-reaching impact,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “Virtually all can be attributed to the supply issue. The economic data has not been that bond bearish.”
Borrowing Costs
The rise in yields is undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing costs and pull the economy out of the worst recession in five decades.
Ten-year yields have risen over 140 basis points since the Fed announced its $300 billion, six-month Treasury purchase program on March 18. The average 30-year mortgage rate jumped to 5.59 percent from 5.29 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The 15-year rate averaged 5.06 percent.
Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds were at 5.07 percent, according to data compiled by Bloomberg. That’s the highest since Nov. 24, the day before the U.S. central bank announced its plans to buy home-loan bonds, and up from 3.94 percent on May 20.
Policy makers “now need to accept that they can’t control the back end and need to focus on the front end,” said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse Group AG, another primary dealer.
Big Leagues
Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said.
“They’re saying they are part of the big leagues,” Alberto Ramos, an economist in New York at primary Goldman Sachs Group Inc.. “They’re not buying IMF bonds to diversify reserves. They want to be seen as having a large voice” in global markets, he said.
Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.
Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “Virtually all can be attributed to the supply issue. The economic data has not been that bond bearish.”
Who is this idiot? Income, including tax revenues, is plummeting across the board. The Dollar is being routed, so of course people ask for greater yield to have their money tied-up over time. This is very much economic.
In fact, the real mystery is that bond investors have accepted such artificially low rates this long. The Fed has gotten away with selling debt in the low-single-digits for the past couple years only because the money-movers of the world haven’t been able to answer the question: what is safer than US Treasuries? Now, they’re finally starting to come up with some alternatives.
I think you’d have to be a complete incompetent not to grasp that the US Treasury market experience a blow-off top last Winter, and probably will never reach those levels again. I’d be preparing clients for double-digit yields in the next couple years or so.