TREASURIES GAINED as the highest yield on a 30-year US bond auction in almost two years attracted investors concerned that record government spending and debt sales will lead to inflation.
“At 4.7 per cent, 30-year Treasuries are compelling,” said Nils Overdahl, a bond-fund manager at New Century in Bethesda, Maryland, which oversees $500 million. “You are really picking up a lot.”
The bonds drew a yield of 4.72 per cent at the auction, the highest since August 2007. Benchmark 10-year note yields reached 4 per cent earlier for the first time since October on concern the budget deficit and a falling dollar will prompt investors to reduce holdings of US debt.
The yield on the 10-year note fell 11 basis points, or 0.11 percentage point, to 3.84 per cent, after climbing as high as 4.0038 per cent, at lunchtime yesterday in new York, according to BGCantor Market Data. The yield last touched 4 per cent on October 16th last.
Treasuries tumbled 6.5 per cent so far this year, the worst performance since Merrill Lynch began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish US 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, 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.”
The rise in yields is undermining Federal Reserve chairman Ben 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 18th.
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.
The demand from indirect bidders such as foreign central banks at yesterday’s 30-year bond auction may help to ease concern that international investors will slow purchases. While leaders of the nations of Brazil, Russia, India and China talk about substituting the dollar, the so-called Bric countries have increased foreign reserves at the fastest pace since September. The nations added more than $60 billion in foreign reserves in May to limit currency gains.
Yields are also rising as the economy shows signs of recovering. A report yesterday showed sales at US retailers rose in May for the first time in three months.
The US may borrow $3.25 trillion in the fiscal year ending September 30th, almost four times the $892 billion in 2008, according to Goldman Sachs. The budget deficit is projected to increase to $1.85 trillion at the end of September, equivalent to 13 per cent of the nation’s economy.
The government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year. During the past 12 months, consumer prices fell 0.7 per cent, the biggest decline since 1955. – (Bloomberg)
