Treasuries Little Changed on Concern Takeover Won't Spur Growth
By Sandra Hernandez and Anchalee Worrachate
Sept. 9 (Bloomberg) --
Treasuries were little changed on speculation the economic slowdown will worsen before a government takeover of Fannie Mae and Freddie Mac intended to shore up the housing market takes hold.
Bonds benefited as traders bought five- and 10-year notes to offset declines in mortgage-bond yields prompted by the government takeover of the two mortgage-finance companies. Pending resales of U.S. homes declined more than forecast in July.
``The bottom line is what has changed is not going to cure the housing market,'' said
Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. ``It's going to help stop the bleeding, it's going to help lay the groundwork, but we still have problems in that sector. Yields are going to stay at these levels.''
The yield on the benchmark 10-year note fell 1 basis point, or 0.01 percentage point, to 3.68 percent at 10:10 a.m. in New York, according to BGCantor Market Data. The price of the 4 percent security maturing in August 2018 rose 3/32, or 94 cents per $1,000 face amount, to 102 21/32. The yield jumped as much as 15 basis points yesterday, the most since July 11.
The two-year note's yield was little changed at 2.33 percent.
Quarterly Gain
Treasuries have gained since the start of the quarter as writedowns and credit-market losses since the collapse of the market for U.S. subprime-mortgage debt surpassed $500 billion. Government bonds of all maturities have returned 2.5 percent since June 30, according to Merrill Lynch & Co.'s U.S. Treasury Master index. They have gained 4.7 percent this year, versus 9.06 percent for all of 2007.
U.S. debt earlier fell as a drop in oil and gains in European equity markets and U.S. stock-index futures damped demand for the relative safety of bonds' fixed returns.
``You saw equities begin to rise in Europe as oil came off, and that allowed Treasury yields to rise,'' said T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, the investment-banking arm of Canada's biggest lender.
Treasuries may fall in the next three months because the U.S. takeover of Fannie Mae and Freddie Mac may force the government to increase debt sales to finance the bailout, Marta added.
``We are still bearish,'' he said. ``There is going to be increased Treasury issuance.''
`Structural Problem'
The Standard & Poor's 500 Index retreated 0.1 percent in early trading. The Dow Jones Stoxx 600 Index of European equities advanced 0.5 percent.
Oil prices fell after Saudi Arabia's oil minister said before the OPEC meeting in Vienna today supplies of crude are sufficient to meet demand. Crude for October delivery fell as low as $103.85 a barrel, down 29 percent from a record $147.27 reached on July 11.
The National Association of Realtors' index of pending home resales fell 3.2 percent in July, after a revised gain of 5.8 percent in June. The median forecast in a Bloomberg News survey of 39 economists was for a 1.5 percent decline.
The government takeover of Fannie and Freddie is ``a step in the right direction'' but not ``a panacea,'' said
Russell Jones, head of global fixed-income and currency research in London at RBC Capital Markets.
`Enormous Overhang'
``There's still an enormous overhang of inventory in the U.S. housing market and that's going to dominate the action for some time to come,'' Jones said in a television interview. ``There's still a long way to go in this crisis.''
Futures on the Chicago Board of Trade show an 87 percent likelihood the Federal Reserve will keep its target rate for overnight loans between banks at 2 percent through the end of 2008, after seven cuts since last September.
Inflation expectations over the next decade, as measured by the difference in yields between 10-year conventional notes and Treasury inflation-Protected Securities, fell as oil prices dropped. The so-called breakeven rate declined to 1.97 percentage points, from 2.05 percentage points a week ago.
Potential declines in mortgage costs are helping buoy Treasuries,
Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker, wrote in a client note today.
Homeowners tend to refinance their mortgages when rates fall. The result is that bonds backed by those loans can mature early, and investors use Treasuries to replace the holdings in their portfolios.
Pimco Plan
Pacific Investment Management Co. may start buying Fannie and Freddie corporate and mortgage-backed debt later this week, said Bill Gross, who manages the world's largest bond fund at Pimco, speaking yesterday on Bloomberg Television.
Five- and 10-year notes reversed losses yesterday as a decline in mortgage bond yields prompted investors in the securities to buy U.S. notes to increase the average maturity, or duration, of the cash flows in their portfolios.
Mitsubishi UFJ Trust & Banking Corp., part of Japan's biggest bank,
forecast the Fannie and Freddie rescue will send yields higher as it helps financial markets.
Fed Chairman
Ben S. Bernanke's announcement on Sept. 7 that he supports the plan indicates he may change the bank's next policy statement on Sept. 16, said
Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ.
The central bank warned that ``financial markets remain under considerable stress'' in its policy statement published Aug. 5.
``Some of the anxiety in the market was resolved by the rescue,'' Bando said. ``Yields will be higher.''
The 10-year rate will rise to 4 percent by month-end, Bando said. It will climb to 3.99 percent by Dec. 31, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weighting.
Last Updated: September 9, 2008 10:12 EDT
