Thursday, March 5, 2009

The difference between two- and 10-year yields widens

Julian Robertson's 2003 estimated net worth was over $400 million, and in 2008 it was estimated at $1.8 billion. Robertson is thought to have shorted the sub-prime. Having long warned of a coming credit crisis, Robertson's bet may have paid off handsomely: his current wealth is estimated by some to exceed $3 billion (

Recently, Julian Robertson was on CNBC and suggested that buying puts on treasuries was a good trade. Bill Gross from Pimco agreed and said that he sees interest rates going to seven percent. Some experts predict the rates reaching 18 percent.

Related ETFs:
TBT - ProShares UltraShort 20+ Year Treasures
PST - ProShares UltraShort 7-10 Year Treasures

We do see the widening of the gap between two- and 10-year yields.

By Wes Goodman of, March 5, 2009

Treasuries were little changed after two days of losses on speculation the government will announce plans to sell $60 billion of notes and bonds next week, raising record amounts to fund efforts to snap the U.S. recession.

Notes slid initially after China said it will “significantly increase” investment to counter a slowdown in the world’s third-biggest economy, eroding demand for the relative safety of government debt. A measure of corporate bond risk in Asia and the Pacific fell and the region’s stocks gained as investors sought higher-yielding assets.

“The U.S. government has to borrow a huge amount of money,” said Satoshi Okumoto, general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $58.1 billion in assets. “If China’s economy recovers quickly, people will expect the world economy to recover, so that’s bad news for the bond market.” He sold Treasuries last week.

The 10-year note yield rose one basis point to 2.98 percent as of 7:27 a.m. in London, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 3/32, or 94 cents per $1,000 face amount, to 98.

Yields, which fell to a record low of 2.034 percent on Dec. 18, averaged 4.64 percent for the past decade.

Spread Widens

The difference between two- and 10-year yields widened to 2.06 percentage points, the most since November, from as little as 1.25 percentage points late last year. The growing spread shows investors are demanding extra to hold long-term maturities because of concern the government will be selling more of them.

The cost of protecting bonds in Asia from default fell after Premier Wen Jiabao reiterated China’s 2009 growth target of 8 percent in a report to the National People’s Congress in Beijing today.

Markit iTraxx’s Asia index of credit-default swaps on the debt of 50 investment-grade borrowers outside Japan fell 25 basis points to 4.35 percentage points, according to Barclays Capital. A basis point is 0.01 percentage point.

Credit-default swaps are contracts that pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. Traders use them to speculate on changes in credit quality. An increase in the price suggests deteriorating investor perceptions of credit quality and a decrease indicates improvement.

MSCI’s Asia Pacific Index of regional shares rose 0.5 percent, gaining for a second day.

Record Sale

The U.S. will probably announce today that it will sell a record $33 billion of three-year notes on March 10, $17 billion of 10-year debt the following day and $10 billion of 30-year bonds on March 12, according to Wrightson ICAP LLC, a research unit of the world’s largest inter-dealer broker. The auctions follow $94 billion of note sales last week.

President Barack Obama’s administration is seeking congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October. His spending plans for the year that ends Sept. 30 would result in a record $1.75 trillion deficit.

The government is relying on overseas investors to help fund aimed at turning around an economy that “deteriorated further” in the past two months, according to the Federal Reserve’s regional business survey.

China is the largest foreign holder of Treasuries, with $696.2 billion, followed by Japan, with $578.3 billion.

“Foreign investors will not be able to absorb that kind of supply,” said Mark MacQueen, who helps oversee $7 billion as co-founder of Sage Advisory Services Ltd. in Austin, Texas. “We can’t expect them to buy more than they bought last year, so rates will have to trend higher,” he said yesterday.

Notes recouped some losses on speculation government reports today and tomorrow will show the U.S. labor market is deteriorating.

More Jobless

The number of people receiving jobless benefits rose to a record 5.16 million, according to the median estimate in a Bloomberg News survey of economists before the Labor Department releases the figures today. The U.S. lost jobs for a 14th month in February, a separate survey showed before the Labor report tomorrow.

U.S. 10-year yields will fall below 2 percent as the economic figures weaken, said Mike Turner, the head of strategy and allocation in Edinburgh at Aberdeen Asset Management PLC.

A Bloomberg survey of economists projects the yield will drop to 2.64 percent by June 30, with the most recent forecasts given the heaviest weightings.

Deflation Risk

“Deflation remains a predominant risk,” Turner wrote in a February report that Aberdeen, the Scottish fund company overseeing $158.4 billion, distributed today. Deflation, a general drop in prices, is good for bonds because it enhances the value of their fixed payments.

U.S. consumer prices were unchanged in the 12 months ended Jan. 31, the Labor Department said Feb. 20, which shows bond investors aren’t losing anything to inflation.

Yields indicate inflation forecasts rose this year.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices climbed to 94 basis points from 9 basis points on Dec. 31. The figure has averaged 2 percentage points over the past two years.

Treasuries handed investors a loss of 3.6 percent in the first two months of 2009, the steepest decline since dropping 4.8 percent between May 2003 and the end of July 2003, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Treasuries gained almost 14 percent in 2008, the best return in 13 years.

“We’re buckling underneath this supply,” said Theodore Ake, head of U.S. Treasury trading in New York at Mizuho Securities USA Inc., one of 16 primary dealers that trade with the Federal Reserve. “Right now the camel’s back is cracking. Rates should be lower, but there’s a massive deficit that we are going to have to fund,” he said yesterday.

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