Treasuries Fall as U.S. Invests $20 Billion in Bank of America

Treasuries Fall as U.S. Invests $20 Billion in Bank of America

Treasuries dropped, with 10-year notes ending a six-day rally, after the U.S. agreed to invest $20 billion in Bank of America Corp. and lawmakers unveiled an $825 billion plan to snap the recession.

Benchmark securities fell the most in almost two weeks, pushing yields to about a quarter percentage point more than the record low set last month, on speculation President-elect Barack Obama will increase borrowing to record levels to pay for the stimulus packages. The latest proposal would add to a budget deficit the Congressional Budget Office says will more than double this year to $1.18 trillion.

“We’re not in Treasuries,” said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by Liechtenstein’s royal family. “If you have $2 trillion deficits, and it might be even more, there will be a lot of supply.”

The 10-year yield rose 11 basis points to 2.31 percent as of 9:10 a.m. in London, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 1 2/32, or $10.63 per $1,000 face amount, to 112 18/32. A basis point is 0.01 percentage point.

Two-year yields increased seven basis points to 0.77 percent.

Treasury notes still headed for a weekly gain after the Commerce Department on Jan. 14 said U.S. retail sales fell for a sixth straight month in December, feeding demand for the relative safety of government debt as the economy shrinks. Ten- year yields declined eight basis points since Jan. 9.

Credit Markets

As part of efforts to support Bank of America, the U.S. also agreed to backstop a $118 billion asset pool to help the lender absorb Merrill Lynch & Co. The U.S. already invested $15 billion in Bank of America, the country’s biggest lender, and another $10 billion in Merrill.

Yields suggest efforts to revive credit markets that froze last year are working.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.98 percentage points from 2008’s high of 4.64 percentage points in October.

The three-month London interbank offered rate for loans in dollars was 1.09 percent as of yesterday. It slid to 1.08 percent the day before, a level not seen since 2003.

Higher Borrowing

McDonald’s Corp., the world’s largest restaurant company, and Wal-Mart Stores Inc., the biggest discount chain, both sold bonds this week. Bond markets in the Asia-Pacific region are having their busiest January for at least a decade, with $32.3 billion in sales.

The decline in Treasuries will increase in the second half of 2009 as efforts to end the U.S. recession take hold and the demand for safety abates, LGT’s Goetti said.

Mitsubishi UFJ Asset Management Co., part of Japan’s largest bank, is taking the same view for 2009, saying yields will rise in the second half because of increased government borrowing, according to Chief Fund Manager Hideo Shimomura.

Net purchases of U.S. long-term bonds, notes and stocks by investors from outside the nation probably rose to $15 billion in November from $1.5 billion the month before, based on a Bloomberg survey of economists. The Treasury Department report is scheduled for 9 a.m. in Washington. The monthly average since the start of 2007 is $61.1 billion.

Government Plan

The $825 billion economic plan unveiled yesterday by House Democrats and being assembled with Obama’s transition team comes after the U.S. budget deficit soared to a record $485.2 billion in the first three months of the fiscal year that started Oct. 1.

Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

The U.S. Senate voted yesterday to release $350 billion in financial-rescue funds, the second half of the $700 billion in the Troubled Asset Relief Program enacted last year.

Government borrowing pushed U.S. marketable debt to a record $5.82 trillion in November, from $4.54 trillion at the end of 2007.

Bond Bulls

Bond bulls say the deepening recession means Treasuries will gain.

“U.S. consumer spending is slowing. The risk of deflation is rising,” said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $44.4 billion in assets. “Yields will decline.”

Ten-year yields may fall below 2 percent this month, he said, surpassing the record of 2.04 percent set Dec. 18.

The worst holiday shopping season in at least four decades is forcing retailers such as J.Crew Group Inc. to cut prices. Toyota Motor Corp., which posted its biggest decline in U.S. sales in more than three decades last year, plans to cut North American vehicle production further in 2009.

The cost of living dropped 0.2 percent for all of 2008, the first annual decline since 1954, according to the median estimate in a Bloomberg News survey of economists before the Labor Department issues the figure today.

Consumer Prices

Consumer prices probably dropped 0.9 percent in December, a third straight monthly slide, the survey showed. The report is scheduled for 8:30 a.m. in Washington.

Treasuries surged after the last consumer-price report on Dec. 16 showed the index fell by 1.7 percent in November, the most ever. The Federal Reserve cut its target for overnight loans between banks the same day to a range of zero percent to 0.25 percent, from 1 percent, to battle the recession.

Ten-year yields fell to 2.26 percent, a record at the time.

The difference between rates on 10-year Treasury Inflation Protected Securities and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 50 basis points from 2.45 percentage points six months ago.

The bulls are in the minority. A Bloomberg survey of banks and securities companies projects the 10-year yield will rise to 3.07 percent and two-year rates will increase to 1.44 percent by the end of the year, with the most recent forecasts given the heaviest weightings.