December 21st, 2007
Two Year Treasuries Fall as Yields Near Low Deter Buying
Treasury two-year notes fell on speculation yields near the lowest since 2004 and rising global stocks will deter investors. Two-year note yields fell 95 basis points in November, the biggest monthly drop in 20 years, as credit market losses spread and traders bet the Federal Reserve next week will cut its interest rate for a third time this year, from 4.50 percent, and lower it further in the first quarter.
“Treasuries are extremely expensive and overbought, and the market is trading on gloom,” said Marius Daheim, a bond strategist at Bayerische Landesbank in Munich. “What could be expected in terms of bad news should be discounted at current yield levels.”
The yield on the benchmark two-year note rose 2 basis points, or 0.02 percentage point, to 2.90 percent at 7:47 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/8 percent note due in November 2009 fell 1/32, or 31 cents per $1,000 face amount, to 100 13/32. Yields move inversely to bond prices.
Daheim expects the two-year Treasury note yield to rise to 3.90 percent in three months.
The cost of borrowing euros overnight fell by the most in almost a month, according to the British Bankers’ Association.
The London interbank offered rate, the amount banks charge each other for such loans, fell 11 basis points to 3.86 percent, its third straight day of declines. That’s 14 basis points less than the European Central Bank’s benchmark rate.
The overnight dollar rate fell 4 basis points to 4.7 percent, the BBA said today.
TED Spread
The so-called TED spread, or difference between three-month Treasury bill yields and the London interbank offered rate, fell 2 basis point to 2.09 percentage points. The spread reached a three-month high of 2.16 percentage points on Nov. 29, signaling banks were increasingly reluctant to lend to each other.
Equity markets in Europe and Asia climbed after the Daily Telegraph reported that the U.K. government may nationalize mortgage lender Northern Rock Plc.
U.S. regulators are considering a freeze on interest rates on subprime mortgages for five years, a person familiar with the negotiations said. More than 30 percent of borrowers with subprime adjustable rate mortgages are behind on their payments before their loans reset higher and 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years, according to estimates from Credit Suisse Group.
Dec. 11 Outlook
The chance policy makers will lower the target for the overnight lending rate between banks to 4 percent on Dec. 11 exceeded 50 percent for the first time yesterday, Fed funds futures contracts show. There odds the Fed will reduce the rate to 3.75 percent by the end of the first quarter are at 47 percent, futures show.
“There are a lot of rate cuts priced in to Treasury yields,” said Sally Auld, an interest-rate strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “You’d be thinking, how much worse can things get?”
Treasury yields will probably increase because inflation is high enough to be a concern, Auld said.
Ten-year yields, more sensitive to inflation expectations than shorter-maturity debt, will climb to 4.11 percent by year- end from 3.9 percent currently, according to the weighted average estimate in a Bloomberg News survey of economists and analysts. The most recent forecasts are given the heaviest weightings.
The difference, or spread, between two- and 10-year yields was 1.01 percentage point today, near the widest since January 2005, as longer-dated bonds have underperformed shorter maturities, due to prevailing concern on inflation.
Economic Data
Declines in bond prices may be tempered by speculation economic reports this week will signal slower economic growth, bolstering arguments for the Federal Reserve to lower rates by half a point at this month’s meeting.
“The market isn’t going to give up on an extended Fed cycle,” said Damien McColough, chief debt strategist at Westpac Banking Corp. in Sydney. “Housing has gotten significantly weaker in the short-term and we think the Fed will come to the rescue.”
ADP Employer Services data will show companies added 50,000 workers last month, less than half the October increase, according to a Bloomberg News economists‘ survey. ADP promotes the data as a leading indicator for the Labor Department’s non- farm payrolls report due on Dec. 7.
The Institute for Supply Management’s gauge of the service sector may decline to 55 from 55.8 in October, according to a separate Bloomberg survey. Both reports are due today.
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