Russia causes some fear in the bond markets
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June 10 (Bloomberg) — Treasuries fell, pushing 10-year yields to the highest level since November, as the government prepared to sell $19 billion in the securities and Russia said it may switch some of its reserves from U.S. debt.
Thirty-year bond yields touched the most in a year after the first deputy chairman of Russia’s central bank said the nation may buy International Monetary Fund bonds. The Federal Reserve began buying debt maturing in 2019 through 2026. Today’s auction is the second of three sales this week that will raise $65 billion, part of the U.S.’s record borrowing program.
“The Fed’s going to buy maybe $3 billion,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 16 primary dealers that trade with the Fed. “We’ve got $19 billion to bid on at 1 o’clock, and then we’ve got bonds following tomorrow. I think we’ll probably be under a lot of pressure.”
The yield on the 10-year note rose four basis points, or 0.04 percentage point, to 3.89 percent at 10:47 a.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 declined 10/32, or $3.13 per $1,000 face amount, to 93 23/32.
The 30-year bond yield rose four basis points to 4.69 percent. It earlier touched 4.73 percent, the highest in a year. The government is scheduled to sell $11 billion of the securities tomorrow.
Russia Switch
Russia’s central bank may switch some of its reserves from Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy.
Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.
Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.
The dollar fell as Russia’s announcement added to speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, decreased 0.2 percent to 79.649, after sliding 1.3 percent yesterday.
“The market is reacting to this Russia thing,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The dollar has restarted its dive to lower levels.”
Reserve Currency
While leaders of the nations of Brazil, Russia, India and China talk about substituting the dollar, the so-called BRIC countries have increased foreign reserves at the fastest pace since September. The nations added more than $60 billion in foreign reserves in May to limit currency gains, data compiled by central banks and strategists show.
Many of those reserves are still being plowed into U.S. debt securities, according to Fed data. The central bank’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.
The Treasury said bidding from foreigners was above average at its $35 billion three-year note auction yesterday. The sale drew bids for 2.82 times the amount of debt available, rising from 2.66 in May. Investors bought the notes after yields rose more than 50 basis points in less than a week.
“The market tends to need to build in fairly heavy concessions before every sale,” said Marc Ostwald, a strategist in London at Monument Securities Ltd. “It will be the same for today’s 10-year auction.”
Annual Loss
Longer maturities are leading losses in the Treasury market in 2009, indicating investors are demanding more yield because of the threat inflation will quicken in coming years.
Thirty-year bonds handed investors a 28 percent loss this year, versus 11 percent for 10-year notes and 0.4 percent for two-year securities, according to indexes compiled by Merrill Lynch & Co. Treasuries of all maturities have fallen 6.2 percent this year, according to Merrill indexes. The securities haven’t posted an annual decline since 1998, according to the index.
The Fed began buying Treasuries maturing between August 2019 and February 2026 today as part of the central bank’s $300 billion, six-month effort effort to reduce lending rates and lift the world’s largest economy out of recession.
Record Borrowing
President Barack Obama may borrow $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to primary dealer Goldman Sachs Group Inc. The budget deficit is projected to increase to $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.
All told, the government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 2.04 percentage points, a nine- month high.
