Monday, February 23, 2009

Avalanche of Treasuries to Hit Market this week


An avalanche of treasuries are set to hit the market this week. The Treasury Department plans to auction $40 billion of two- year notes tomorrow, $32 billion of five-year securities and $22 billion of seven-year this week. This will be an important test of the market and its ability to absorb government debt, but it is only the beginning of a long series of massive auctions of treasury securities.
The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at U.S. debt sales. The figure is almost triple the $892 billion in notes and bonds it sold in the previous 12 months.
In a separate news item Hillary Clinton was calling on China to keep buying Treasuries this weekend.
“It would not be in China’s interest” if the U.S. were unable to finance deficit spending to stimulate its economy, Clinton said yesterday in an interview in Beijing with Shanghai- based Dragon Television.
This weeks Treasury auctions will be watched closely in the markets. A bigger issue moving forward is whether or not this avalanche of treasury sales is going to crowd corporation, states and municipalities out of the market. I think that is likely and we will be following that closely in the weeks and months ahead.
Subscribe to All American Investor via Email

Treasuries Fall on Speculation U.S. to Increase Citigroup Stake

Treasuries fell, paring two weeks of gains, as stocks rose on speculation the U.S. is planning to boost its stake in Citigroup Inc., increasing the likelihood of additional debt sales as borrowing soars.

Ten- and 30-year securities led the declines as the MSCI World Index snapped nine days of losses after the Wall Street Journal reported Citigroup is in talks with federal officials. The U.S. is planning to sell a record $94 billion of notes this week, raising speculation investors will demand higher yields to purchase the securities.

“We’ve got supply coming back into the market all this week,” said Padhraic Garvey, head of investment-grade debt strategy in Amsterdam at ING Groep NV. “We’re also seeing a reversal of the large risk aversion trade this week.”

Ten-year yields increased five basis points to 2.84 percent as of 11:15 a.m. in London, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 13/32, or $4.06 per $1,000 face amount, to 99 8/32. A basis point is 0.01 percentage point.

The yield, which touched a record low of 2.04 percent on Dec. 18, has averaged 4.65 percent during the past decade. Yields slid 10 basis points last week as falling stocks drove investors to bonds.

The U.S. government may end up with as much as 40 percent of Citigroup’s common stock, the Wall Street Journal said citing people familiar with the matter.

‘Wall of Supply’

“Treasuries face a wall of supply and the fact that Citigroup may need more government intervention means there may be more sovereign bond issuance to come,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a securities broker for banks and institutional investors. “That’s unnerving investors.”

Banks may have to be nationalized for “a short time” to help lenders such as Citigroup and Bank of America Corp. survive the U.S. economic slump, Senate Banking Committee Chairman Christopher Dodd said Feb. 20.

U.S. yields indicate bets on inflation have been rising over the past three months.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 115 basis points. The spread climbed from minus eight basis points in November, and the six-month average is 95 basis points.

Stocks Advance

Consumer prices were unchanged over the last 12 months, a Labor Department report showed Feb. 20, meaning bond investors aren’t losing anything to inflation. The so-called real yield of 2.81 percent is close to the most since 2006.

Stocks in Europe and Asia climbed, pushing the MSCI World Index higher for the first time in 10 days, with a gain of 0.7 percent.

“It’s an unwinding of the flight to quality,” said Kazuaki Oh’e, a Tokyo-based debt salesman at Canadian Imperial Bank of Commerce, Canada’s fifth-biggest bank.

Government efforts to support the banking system will help corporate bonds outperform Treasuries, David Kotok, chief investment officer at Cumberland Advisors Inc. in Jersey City, wrote in a report today.

“The story circulating about Citigroup is a way for the idea of nationalization to get vetted,” wrote Kotok, who oversees $1 billion.

Treasuries have handed investors a 2.7 percent loss so far in 2009, while U.S. company bonds returned 1 percent, according to indexes complied by Merrill Lynch & Co.

The Treasury Department plans to auction $40 billion of two- year notes tomorrow, $32 billion of five-year securities on Feb. 25 and $22 billion of seven-year debt on Feb. 26.

Higher Yields

“That’s a lot of bonds that need to be sold,” said Peter Jolly, head of market research at National Australia Bank Ltd.’s investment-banking unit in Sydney. “The bias this week will be for yields to rise.”

The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at U.S. debt sales. The figure is almost triple the $892 billion in notes and bonds it sold in the previous 12 months.

Treasuries rose initially after U.S. Secretary of State Hillary Clinton said China, the largest foreign holder of Treasuries, should keep buying to help fund President Barack Obama’s economic-stimulus plans.

“It would not be in China’s interest” if the U.S. were unable to finance deficit spending to stimulate its economy, Clinton said yesterday in an interview in Beijing with Shanghai- based Dragon Television.

‘Good for Treasuries’

“Clinton’s statement is good for Treasuries,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s largest bank. “It will make yields decline.”

Fund managers became less bearish on Treasuries last week, a survey by Ried, Thunberg & Co. showed.

The company’s index measuring the investor outlook through the end of March rose to 44 in the seven days ended Feb. 20 from 43 the week before. The economic analysis firm in Jersey City, New Jersey, surveyed 25 fund managers controlling $1.39 trillion. A reading below 50 means investors expect prices to fall.

For all the $9.7 trillion pledged by the U.S. to combat the financial crisis, money markets show the world’s biggest banks see no recovery before 2010.

‘Barometer of Fears’

The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, rose above 1 percentage point last week for the first time since Jan. 9. Contracts traded in the forward market indicate the gauge, which measures banks’ reluctance to lend, will remain higher for the rest of the year than before Sept. 15, when the bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

“Libor-OIS remains a barometer of fears of bank insolvency,” former Federal Reserve Chairman Alan Greenspan said in an interview. “That fear has been substantially reduced since mid-October, but the decline has stalled well short of any semblance of normal markets.”

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, rose to 98 basis points from 91 basis points on Feb. 10.

Thirty-year fixed mortgage rates rose to 5.04 percent in the seven days ended Feb. 19 from 4.96 percent in the middle of January, according to loan finance company Freddie Mac. Rates are about 2.25 percentage points higher than 10-year Treasury yields, widening from 1.48 percentage points five years ago.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.


More from All American Investor




No comments:

Post a Comment