Treasury 10-Year Yields Head for Record Low on Demand for Haven

By Daniel Kruger - Dec 29, 2012 7:00 AM GMT+0200

Bloomberg

Treasury 10-year note yields were poised for the lowest annual average since at least World War II as investors spent 2012 seeking haven from Europe’s debt crisis, tepid global growth and a U.S. budget showdown.

The benchmark note yield traded below 2.4 percent throughout the year as sluggish job growth led the Federal Reserve to expand debt purchases to push investors toward higher-yielding assets and stimulate growth. The yield’s decline was tempered as risk appetite improved and reports signaled economic advances. U.S. employers added 150,000 jobs in December, data next week were forecast to show.

“The key thing is not what the Fed did, it’s that the Fed was thwarted in its attempts by the demand for safety despite the lack of return,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “That’s impossible to have predicted.”

The benchmark 10-year yield has declined 18 basis points, or 0.18 percentage point, to 1.7 percent this year in New York through yesterday, according to Bloomberg Bond Trader prices. It was headed for a third yearly loss, its longest streak since the 2000-2002 period. The yield touched a record low 1.379 percent on July 25 at the height of concern that Europe’s leaders were struggling to stem the region’s sovereign-debt crisis.

The 10-year yield averaged 1.79 percent this year. The previous low was 1.95 percent in 1941, according to “A History of Interest Rates” by Sidney Homer and Richard Sylla. Last year’s average was 2.77 percent.

Yields on 30-year bonds decreased three basis points to 2.87 percent, little changed from the end of 2011.

Budget Stalemate

Ten-year notes posted their first weekly gain in a month yesterday, pushing the yield below its 200-day moving average of 1.74 percent, as President Barack Obama and congressional leaders met before the year-end deadline in a budget showdown.

The U.S. faces $600 billion in spending cuts and tax boosts starting next month if an accord isn’t reached. If that happens, the economy would probably enter a recession in the first half of 2013, the Congressional Budget Office has said.

Obama said after the meeting he’s “modestly optimistic” Congress can pass a bill to avert the tax and spending changes. He said Senate Majority Leader Harry Reid, a Nevada Democrat, and Republican Leader Mitch McConnell of Kentucky agreed to work on “a potential agreement.” The Republican-led House is scheduled to convene on Dec. 30 in a rare Sunday session.

“I don’t anticipate any sense of optimism to be the net result of what transpires over the weekend,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Anyone looking for a grand compromise or anything other than a temporary stop-gap bill on Monday will be disappointed.”

Fed Stimulus

The Fed expanded monetary stimulus this year as Chairman Ben S. Bernanke called unemployment “a grave concern.” It began a third round of securities-buying with open-ended purchases of $40 billion of mortgage bonds a month, and said it will acquire an additional $45 billion of Treasuries each month beginning next year.

The purchases are forecast to absorb 90 percent of net fixed-income issuance in 2013.

Economic output in the U.S. is likely to increase 2 percent next year after having grown 2.2 percent in 2012, according to a Bloomberg News survey of 86 economists.

“I don’t think we’re solving a lot of problems here,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $83 billion. “Obviously the big thing that fixes lots of, or even all, problems is significant economic growth, and that has proved elusive for pretty much everybody.”

Jobs, Housing

The U.S. jobless rate held steady in December at 7.7 percent, the lowest level since 2008, economists in a Bloomberg News survey forecast before the Labor Department reports employment data on Jan. 4. The average rate from 2000 through 2007 was 5 percent. The U.S. economy created 1.7 million jobs in this year through last month, department data show.

Home builders in November capped the strongest three months for residential construction in four years as record-low borrowing costs buoyed the housing market, data showed.

“We’ve seen disappointingly slow but still positive movement in the employment situation and the housing market,” said Gregory Whiteley, who manages investments in government debt at Los Angeles-based DoubleLine Capital LP, which has $50 billion in assets. “Progress on the employment front is at risk with this fiscal-cliff situation.”

Record Demand

Treasury auctions drew record demand as investors sought the safety of U.S. government debt. Investors submitted $3.15 in bids for every dollar of the $2.153 trillion of notes and bonds sold this year, surpassing last year’s record $3.04.

The primary dealers that trade with the Fed boosted holdings of Treasuries to a record $145.7 billion as of Dec. 19 from this year’s low of $59 billion in March, Fed data show.

Treasuries returned 2.3 percent this year through Dec. 27, according to the Bank of America Merrill Lynch Treasury Index. The Standard & Poor’s 500 Index gained 15 percent, including reinvested dividends. U.S. bonds returned less than 0.1 percent this quarter and lost 0.4 percent this month, the data show.

Hedge-fund managers and other large speculators decreased their net-long position in five-year note futures in the week ending Dec. 25 to the lowest level since May 2010, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 9,329 contracts on the Chicago Board of Trade. Net-long positions fell by 56,678 contracts, or 86 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net