Ten-year Treasury yields fell to the lowest level in eight weeks as the yen strengthened to a 14-year high versus the dollar, boosting speculation the Bank of Japan will intervene in the currency markets. Treasuries headed for a third weekly gain as economists forecast the Federal Reserve will keep interest rates near zero until the third quarter of next year. U.S. markets were shut yesterday for the Thanksgiving holiday.
“There is a spike in risk aversion and Dubai was the trigger for that,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse AG in Zurich. “It’s bullish for Treasuries and this will likely dominate today.”
The yield on the benchmark 10-year note fell 8 basis points to 3.20 percent as of 10:18 a.m. in London, according to BGCantor Market Data. It slid earlier 12 basis points to 3.15 percent, the biggest decline since Oct. 30. The yield has declined 17 basis points this week. The 3.375 percent security due November 2019 rose 21/32, or $6.56 per $1,000 face amount, to 101 16/32.
Dubai World, the government investment company burdened by $59 billion of liabilities, will ask all creditors for a “standstill” agreement as it negotiates to extend debt maturities, Dubai’s Department of Finance said two days ago in an e-mailed statement.
Stocks Slide
The MSCI World Index of shares slid 0.7 percent today after dropping 1.4 percent yesterday. Futures on the Standard & Poor’s 500 Index dropped 2.5 percent.
The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 23 basis points to 564, according to JPMorgan Chase & Co. prices at 7:18 a.m. in London. The index is a benchmark for the cost of protecting bonds against default and an increase indicates a deterioration in perceptions of credit quality.
Japan’s currency rose to 84.83 per dollar today, the strongest since July 1995, increasing concern the nation’s monetary authorities will intervene to curb further appreciation of the currency.
“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The BOJ may sell the yen “and buy Treasuries, which will be a plus for Treasuries.”
Yen Intervention
Japan’s most recent intervention took place on March 16, 2004, when the central bank sold the yen. Finance Minister Hirohisa Fujii said on Nov. 26 the government needs to take action on “abnormal” currency movements, and Prime Minister Yukio Hatoyama said the same day the yen’s appreciation was due to weakness in the dollar.
Demand for Treasuries increased this week as Fed policy makers indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline.
“Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” according to minutes of the Fed’s November meeting released Nov. 24.
Yield Curve
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 2.14 percentage points from 2.19 percentage points last week.
The difference between two- and 10-year rates, known as the yield curve, widened 4 basis points to 2.56 percentage points today, according to data compiled by Bloomberg. Two-year year yields tend to follow what the Fed does with interest rates, while those on longer-maturity securities are more influenced by the outlook for inflation.
Treasuries of all maturities have gained 1 percent so far this month, according to indexes compiled by Merrill Lynch & Co.
The securities have handed investors a loss of 1.5 percent in 2009, headed for the first decline since 1999 as President Barack Obama borrows record amounts to fund spending programs and service deficits. U.S. marketable debt totaled $6.95 trillion in October, after climbing to a record $7.01 trillion in September.
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