DJ Treasurys Up On Fed Buying, Stocks, Industrial Production

NEW YORK (Dow Jones) 2009-06-16 --Treasurys rebounded Tuesday afternoon, with prices lifted by bond purchases by the Federal Reserve, weakness in equity markets and as a decline in industrial production for May overshadowed a rise in housing starts.

The buying extended gains from Monday and sent the yield on the benchmark 10-year note lower; the 10-year note's yield, which briefly broke above 4% last week, touched as low as 3.667%.

In recent trading, the two-year note's price was up 1/32 at 99 11/32 to yield 1.21%, the three-year note was up 4/32 to 100 4/32 to yield 1.8% and the 10-year note was up 6/32 to 95 11/32 to yield 3.69%. The 30-year bond was up 22/32 to 95 24/32 to yield 4.51%. Bond yields move inversely to prices.

The Fed on Tuesday bought $6.45 billion of Treasurys, targeting maturities between three years to four years. The size of the purchase was larger compared with about $6 billion in previous buying in the sector. The three-year notes were among the biggest winners on the curve as $5.948 billion of the Fed's buying went to the three-year maturity just auctioned off last week.

The larger-than-usual buying comes at a time when the market is split on the Fed's next move regarding its Treasurys-buying program ahead of the central bank's rate-policy meeting next week. Policymakers recently signaled they are unlikely to lift the size of the central bank's $300-billion purchase program since the recent rise in bond yields resulting from a reduction in risk aversions.

Since launching the program in late March, the Fed has bought more than $160 billion of Treasurys and, on Wednesday, it will conduct another round of buying, this time targeting maturities between seven years and 10 years.

"As we approach the end of the [Treasurys buying program], the market is going to be increasingly sensitive to seemingly small changes in the [purchases] or Fed speak as they try to extrapolate a larger meaning for rates as a whole," said Christian Cooper, interest-rate strategist at RBC Capital Markets in New York.

Traders said the Fed's buying in mortgage-backed securities also spurred MBS servicers and portfolio managers to unwind some of their hedges. The recent rise in bond yields has boosted mortgage rates and generated hedges against further increases in rates. Selling Treasurys has been the common way to hedge.

Some dealers and investors who have accumulated bets against the Treasurys market also bought back bonds to cover part of their so-called short positions, also generating bids into Treasurys, market participants said.

The 10-year note's yield briefly broke above 4% Thursday as a result of sell-offs over the past few weeks amid mounting government debt supply, worries about U.S. budget deficits and inflation and waning demand from foreign investors.

But, since Friday, buying returned to Treasurys as many institutional investors came back to the market on a belief that yields have risen too far, too fast, which may start to weigh on recovery in the housing market and the broader economy. The 10-year note's yield has risen more than 160 basis points from the record low level hit in mid-December.

"Treasury yields are the camel that broke its own back," said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto. "Ultimately, the earlier overly exuberant sell-off in Treasurys was the architect of its own demise."

Lascelles said he expects the U.S. consumer price index report Wednesday to "pour a bucket of cold water on inflation fear-mongers" now that tobacco tax adjustments, a reason behind the recent increases in inflation data, are out of the way.

The producer price index for finished goods advanced 0.2% in May from April, the Labor Department said Tuesday, much less than the 0.6% rise that economists in a Dow Jones Newswires survey had expected. The PPI was down 5% from one year ago, the biggest decline since August 1949.

The core PPI, which excludes food and energy, slid 0.1% from April, the first decline since October 2006. Economists had expected a 0.1% rise.

 

Treasury Swap Spreads to Steepen, RBC Says: Technical Analysis

June 2 (Bloomberg) --Investors should bet on a narrowing of the 10-year swap spread and a widening of the 30-year swap spread as concern about record Treasury issuance and inflation increase, according to RBC Capital Markets. "We are entering a period of wider swap spreads in general and in particular wider spreads on the back end of the curve,"wrote Christian Cooper, interest-rate strategist at RBC, the investment-banking arm of Canada's biggest lender, in a note to clients.

"Massive paying in the recent convexity trade has tempered any receiving on the back of new issuance, but we do expect 10-year spreads to trade tighter from the recent highs."

In most swaps, two parties agree to exchange fixed for floating interest-rate payments over a period of time with the floating rate typically based on changes in the London interbank offered rate, or Libor. Swap rates serve as benchmarks for many types of debt often purchased with borrowed money, including mortgage-backed assets and auto-loan securities.

RBC is recommending paying the fixed-rate on 30-year spreads and receiving the fixed-rate on 10-year spreads. The 30- year swap spread, the difference between the fixed-rate portion of the swap and the U.S.

Treasury bond, is negative 15.38 basis points. The spread has been negative since January. The 10-year swap spread widened one basis point to 32.75 basis points today.

"The biggest short term risk to this trade is 10s trading down to 3.75 percent and the possibility of convexity payers being forced back into the market similar to last week. In the event the convexity trade resumes, 10-year spreads would likely widen more than 30-year spreads,"Cooper said.

Treasury yields reached a six-month high last week, causing yields on mortgage bonds to surge and prompting holders of the securities to sell government debt used as a hedge to protect portfolios against rising interest rates.

Convexity is a measure of the rate of change of a bond's duration because of interest rate movement.

 

Bonds Fall on Better-Than-Expected Economic Data
Treasurys tumble, pushing yields higher, amid latest batch of improving economic data

NEW YORK June 18, 2009--Fresh evidence of an improving economy pushed long-term Treasury yields higher on Thursday — a troubling sign for homeowners and those interested in buying a home.

Yields on long-term Treasurys are closely tied to interest rates on mortgages and other consumer loans. Borrowing costs have already been on the rise, but climbing yields could push them even higher, potentially putting a crimp on an economic recovery.

The yield on the 10-year Treasury note jumped to 3.81 percent from 3.69 percent late Wednesday as its price fell 29/32 to 94 11/32. Last week, the 10-year yield had soared to an 8-month high of 4.01 percent.

Treasurys sold off sharply after the Labor Department said the overall number of people drawing unemployment benefits fell for the first time since early January. The drop broke a string of 21 straight increases.

Later Thursday, a private sector group said its forecast of economic activity rose more than expected in May, marking a second straight month of gains after seven months of declines. And the Philadelphia Reserve Bank said manufacturing around the mid-Atlantic region has improved. This spurred more selling in the Treasury market.

Christian Cooper, interest rate strategist at RBC Capital Markets, said worries about the large supply of debt in the market tend to escalate when there is positive economic data to support a move into riskier assets such as stocks. On Thursday, stocks finished mostly higher after three straight days of losses.

News that the Treasury Department has slightly increased the amount of debt it plans to issue next week further rattled the market Thursday. The Treasury will auction off a total of $104 billion in two, five and seven-year notes next week.

Worries over the vast amounts of government debt hitting the market and the subsequent potential for inflation have plagued investors for weeks. These fears have put pressure on the Treasury market, sending yields higher.

The yield on the 30-year bond rose to 4.59 percent from 4.52 percent late Wednesday as its price fell 1 point to 94 17/32.

The two-year note's yield jumped to 1.26 percent from 1.17 percent, as its price fell 5/32 to 99 8/32. The yield on the three-month Treasury bill rose slightly to 0.17 percent from 0.16 percent. Its discount rate was 0.18 percent.

The cost of three-month dollar loans between banks was unchanged for a third straight day. The British Bankers' Association said the rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — held steady at an all-time low of 0.61 percent