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Treasuries Advance as Asian Stocks Decline, RBA Sees ‘Below-Trend’ Growth

Published: March 6, 2012 | 8:17 am
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Treasuries rose as Asian stocks fell and Reserve Bank of Australia Governor Glenn Stevens said he sees “below-trend” world economic growth this year, spurring demand for the relative safety of government securities.
The Federal Reserve may buy as much as $4.25 billion of U.S. debt due from March 2018 to February 2020 today, according to the Fed Bank of New York website. The central bank is in the process of swapping $400 billion of shorter-maturity Treasuries in its holdings with longer-term bonds to cap borrowing costs. Ten-year rates have been within 21 basis points of 2 percent since the start of November, after the central bank announced the plan Sept. 21.
“Yields will maintain this low range,” said Masazumi Fukuoka, a senior dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded lender. “In the short term, the economy will show some strong figures, but it may not recover as people expect.”
Ten-year yields declined one basis point to 2 percent as of 7:08 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 rose 1/8, or $1.25 per $1,000 face amount, to 100 1/32. The rate increased four basis points, or 0.04 percentage point, yesterday.
The MSCI Asia Pacific Index of shares fell for a second day, dropping 1.1 percent. The MSCI All Country World Index (MXWD) slid for a third day, the longest decline since January.
Japan’s benchmark 10-year yield slipped half a basis point to 0.985 percent.

‘Below-Trend’ Growth

The RBA held its benchmark interest rate unchanged at 4.25 percent at a policy meeting today. “Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring,” Stevens said in his statement.
Investor appetite for riskier assets waned after China cut growth projections yesterday, Credit Agricole Corporate & Investment Bank, a unit of France’s second-biggest bank, said in a report today. China pared its annual economic growth target to 7.5 percent from an 8 percent goal in place since 2005.
U.S. economic growth will quicken to 2.2 percent in 2012 from 1.7 percent in 2011, Bloomberg surveys of analysts show. The euro-area economy will shrink 0.4 percent this year, based on the responses.

Bunds Versus Treasuries

Mitsubishi UFJ’s Fukuoka said he favors German bunds because of the disparity of economic outlooks. German 10-year bunds yield about 17 basis points less than same-maturity Treasuries. The difference was 18 basis points yesterday, the most since November based on closing levels.
Investors who are betting on faster U.S. economic growth say an industry report and government figures this week will show the U.S. economy added more than 200,000 jobs last month.
“It will be a gradual but steady pace of growth,” said Kei Katayama, a bond manager at Daiwa SB Investments Ltd., which has the equivalent of $60.8 billion and is part of Japan’s second-largest brokerage. “Commodities, stocks and credit products should outperform Treasuries.”
ADP Employer Services may say companies in the U.S. added 213,000 workers in February, versus 170,000 in January, according to a Bloomberg News survey before tomorrow’s data.

New Jobs

The Labor Department’s employment report on March 9 will show employers added more than 200,000 jobs for a third month, according to another Bloomberg survey.
The 10-year rate will advance to 2.53 percent by year-end, according to predictions from banks and securities companies, with the most recent forecasts given the heaviest weightings. Daiwa SB’s Katayama predicts 3.5 percent.
Treasuries fell yesterday after an index of U.S. service industries rose to the highest level in a year and as Greece said it expected private creditors to accept losses on the nation’s debt.
Dallas Fed President Richard Fisher said yesterday he opposes additional central bank purchases of securities and urged market participants to get ready to become less dependent on monetary easing.
Company bonds are outperforming U.S. government securities this year. Yields of highly rated and below-investment-grade corporate debt are 2.80 percentage points more than Treasuries, the least in seven months, according to Bank of America Merrill Lynch indexes.

Loss From Treasuries

Treasuries have handed investors a 0.4 percent loss this year as of yesterday, versus a 3.5 percent gain for the corporate bond gauge.
The MSCI All Country World Index (MXWD) of stocks returned 11 percent in the period, including reinvested dividends. The Standard & Poor’s GSCI Spot Index (SPGSCI) of 24 commodities gained 9.1 percent.
Yields indicate investors cut bets on inflation over the past week.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, narrowed to 2.22 percentage points from 2.27 percentage points on Feb. 28. The average over the past five years is 2.03 percentage points.
Five-year inflation swaps, which allow investors to exchange fixed-interest rates for returns equivalent to the consumer price index, declined to 2.36 percent from 2.42 percent. The five-year average is 2.11 percent.

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