Two-Year Treasury Yield Near 18-Month Low on Subprime Concern
By Daniel Kruger and Agnes Lovasz[/url]
Aug. 15 (Bloomberg) -- Two-year Treasury yields fell to an 18-month low on signs losses linked to U.S. subprime mortgages are widening.
Two-year notes, more sensitive to interest-rate expectations, gained as traders bet the Federal Reserve will cut borrowing costs. The latest company hit by the subprime fallout was Sydney-based Basis Capital Fund Management Ltd., which said losses at one of its hedge funds may exceed 80 percent. Merrill Lynch & Co. downgraded Countrywide Financial Corp., the biggest U.S. mortgage lender, to ``sell.'' A report showing slowing inflation also boosted debt.
``As long as other markets remain dysfunctional the bid will remain in Treasuries no matter where inflation is,'' said William O'Donnell, U.S. government bond strategist at UBS Securities in Stamford, Connecticut, one of 21 firms that trade with the Fed.
The yield on the benchmark two-year note fell 2 basis points, or 0.02 percentage point, to 4.33 percent as of 10:49 a.m. in New York, according to bond broker Cantor Fitzgerald LP.
The price of the 4 5/8 percent security due July 2009 rose 1/16, or 63 cents per $1,000 face amount, to 100 17/32. Ten-year yields were little changed at 4.73 percent.
Treasuries pared their gains as U.S. stocks rebounded after falling at the start of trading.
Consumer prices rose 0.1 percent in July, the least in eight months, from 0.2 percent in June, a government report showed. U.S. industrial production rose 0.3 percent in July, after a 0.6 percent increase in June, the Fed said today.
Favoring Shorter Maturities
In a sign investors are favoring shorter-maturity debt as a haven, benchmark 10-year notes yielded about 40 basis points above two-year Treasuries, the most since June 2005. Investors also demanded higher yields to hold the longer-maturity notes.
``The safest trade we've been involved in has been'' for the yield difference between the two maturities to increase, said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest bank.
Yields on two-year notes exceeded those on 10-year notes, a situation known as an inverted yield curve, as recently as June 5. From June 2006 through June 2007 the yield curve was inverted 83 percent of the time.
International holdings of Treasuries increased by $54.3 billion in June, compared with a gain of $21.6 billion in May, the Treasury Department said today.
Merrill, in its report on Countrywide, raised the possibility of bankruptcy if the company loses access to short- term financing. Amber Cousins, a spokeswoman for Calabasas, California-based Countrywide, didn't immediately return a call for comment.
Rate Cut Bets
Traders see an 88 percent chance the Fed will lower its 5.25 percent overnight rate for loans between banks to 5 percent at its Sept. 18 meeting, from 24 percent a week ago, according to interest-rate futures. The odds for a cut to 4.75 percent in December rose to 47 percent, from 24 percent.
Federal funds traded with a yield of 5 percent, below the central bank's 5.25 percent target rate.
The Fed's overnight lending rate was 93 basis points higher than the two-year Treasury yield, the most since 2001, a year in which the central bank cut its target rate 11 times to 1.75 percent from 6.5 percent.
The U.S. subprime mortgage crisis will cost credit investors about $150 billion in losses worldwide, Calyon, the investment banking unit of Credit Agricole SA, France's third-largest bank by market value, estimated today.
``No doubt in the next few days there's going to be more names of companies experiencing stress,'' said Steven Major, head of fixed-income strategy at HSBC Holdings Plc in London. ``Investors want to hold cash, or the next best thing, government bonds. The two-year can gain more.''
Edited by SemiBizz, 15 August 2007 - 10:25 AM.
