ECONOMIC INDICATORS

Treasuries gain as equities slump on signs global growth slowing

BLOOMBERG FILE PHOTO/BRENDAN SMIALOWSKI
THE U.S. FEDERAL Reserve building stands in Washington, D.C., U.S.
Posted 8/22/12

NEW YORK - 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. 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 lack of global growth story is having an impact,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Conn. “The minutes are probably the main story, but the risk could be that they come across as more dovish, reflecting information in July that took rates back 45 basis points. Their views may have been tempered since then.”

The benchmark 10-year yield declined three basis points, or 0.03 percentage point, to 1.77 percent at 8:36 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in August 2022 rose 9/32, or $2.81 per $1,000 face amount, to 98 23/32. The yield, which touched a record low 1.379 percent on July 25, yesterday moved above its 200-day moving average of 1.86 percent.

The 30-year bond yield fell to 2.86 percent after trading above the 200-day moving average of 2.96 percent for the last two days.

The MSCI World Index of stocks slid 0.4 percent, while the Stoxx Europe 600 Index dropped 0.9 percent.

Japan exports

The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, shows Treasuries are the most expensive in more than a week. The gauge was negative 0.77 percent today, after reaching 0.70 percent on Aug. 16, the least expensive since May. It reached a record negative 1.02 percent, the most expensive level ever, on July 24. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

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 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.

Jackson Hole

The Fed is charged with promoting “maximum employment, stable prices, and moderate long-term interest rates,” according to the central bank’s website.

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.

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

Treasuries have handed investors a loss of 1.4 percent this month, according to a Bank of America Merrill Lynch index.

The August slump in bonds is poised to end, based on a Bloomberg survey of economists. Ten-year yields will be at 1.78 at Dec. 31, according to the responses, with the most recent projections given the heaviest weightings.

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.

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