Treasuries rose for a fourth day as global equities slumped after Japanese trade figures fell short of economists’ forecasts, reinforcing concern that Europe’s debt crisis and a slowdown in China are damping global growth.
Longer-term securities led advances before the Federal Reserve releases the minutes of its July 31-Aug. 1 policy meeting today. Vincent Reinhart, a former Fed official, urged Chairman Ben S. Bernanke to do more to spur growth. Chicago Fed President Charles Evans said a weakening in global trade is awful. Gains were limited before reports this week that analysts said will show U.S. home sales and durable goods orders rose last month.
“The main drivers today for Treasuries will be the housing data on one side and the equity trend on the other,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Profit taking in equities should be a supportive factor for Treasuries. Existing home sales have the potential to surprise to the upside. That would limit the upside for Treasuries today.”
The benchmark 10-year yield declined two basis points, or 0.02 percentage point, to 1.78 percent at 6:53 a.m. New York time. The 1.625 percent note maturing in August 2022 rose 5/32, or $1.56 per $1,000 face amount, to 98 18/32.
The MSCI World Index of stocks slid 0.3 percent, while the Stoxx Europe 600 Index (SXXP) dropped 0.8 percent.
Japan Exports
Japan’s exports fell 8.1 percent in July from a year earlier, the Ministry of Finance said in Tokyo. Economists surveyed by Bloomberg forecast a decline of 2.9 percent.
Japanese shipments to the European Union slumped 25 percent, the biggest drop since October 2009, and those to China slipped 12 percent, the ministry said. European governments are struggling to find ways to pay their debts, while China’s gross domestic product growth has slowed for six quarters.
“The market is too optimistic on the economy,” said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets. “Buy on dips.” Yang said he may increase his U.S. bond holdings today.
The U.S. central bank will consider circumstances in the economy and financial stability to decide whether it needs to step up monetary easing, Evans said to reporters today in Beijing. He declined to elaborate ahead of a scheduled press briefing tomorrow at the U.S. Embassy in China’s capital.
Bernanke should assure investors that “he’ll do whatever it takes” to stimulate the slowing economy, Reinhart, chief U.S. economist at Morgan Stanley, said yesterday.
Jackson Hole
The chairman ought to use his Aug. 31 speech at the Fed symposium in Jackson Hole, Wyoming, to expand his commitment to providing accommodation if needed because the central bank is falling short of its mission, Reinhart said in an interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. Reinhart is the former head of the Fed board’s Division of Monetary Affairs.
The Fed is charged with promoting “maximum employment, stable prices, and moderate long-term interest rates,” according to the central bank’s website.
Investors who predict Treasury yields will rise say there are signs of improvement in the U.S. economy even as other countries struggle. Reports this month on retail sales and nationwide industrial production both showed gains.
Purchases of existing homes in the U.S. rose 3.2 percent in July from the month before, after sliding 5.4 percent in June, based on a Bloomberg survey of economists before the National Association of Realtors report today.
Monthly Loss
Ten-year yields rose to a three-month high of 1.86 percent yesterday from the record low of 1.379 percent July 25. Treasuries have handed investors a loss of 1.4 percent this month, according to a Bank of America Merrill Lynch index. (MXWO)
“I could see the U.S. 10-year yield going up a bit further,” said Roger Bridges, who oversees the equivalent of $15.9 billion as head of fixed income at Tyndall Investment Management Ltd. in Sydney. “The U.S. is beginning to pick up.”
Bridges favors shorter maturities, those that fall least if yields rise, he said. The 10-year yield may climb to match this year’s high of 2.4 percent, he said. An increase to that level by Dec. 31 would result in a 4.7 percent loss for someone who bought today, according to data compiled by Bloomberg.
The Fed is scheduled to buy as much as $2 billion of Treasuries due from February 2036 to August 2042 today as part of its efforts to exchange shorter-term Treasuries in its holdings for those due in six to 30 years to support the economy by putting downward pressure on long-term borrowing costs.
The U.S. central bank also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing.
Policy makers need to see improvement, particularly in the labor market, Michael Carey, chief economist for North America at Credit Agricole Corporate & Investment Bank in New York, wrote in a report today. “Or else additional stimulus measures are likely,” he wrote.
