Thursday, December 27, 2007

Treasuries Snap Four-Day Decline on Durables, Jobless Data

By Deborah Finestone

Dec. 27 (Bloomberg) -- Treasuries rose for the first time in five days after government reports showed a weaker-than- forecast gain in durable goods orders and jobless claims reached a two-year high.

Ten-year notes increased the most in more than a week on speculation U.S. consumers will reduce spending as rising delinquencies on subprime mortgages crimp economic growth. Treasuries also gained as the assassination of Benazir Bhutto, Pakistan's former prime minister, prompted investors to seek the safety of government debt.

``We're seeing a tremendous amount of slowdown in the economy,'' Michael Franzese, head of government bond trading for Standard Chartered in New York, said during an interview on Bloomberg Radio. ``There's still value in bonds.''

Benchmark 10-year note yields declined 9 basis points to 4.19 percent at 4 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield fell the most since Dec. 19. The price of the 4 1/4 percent security due November 2017 rose 22/32, or $6.88 per $1,000 face amount, to 100 15/32.

Fed funds futures contracts on the Chicago Board of Trade indicate a 78 percent chance the Federal Reserve will cut its target rate for overnight loans between banks by a quarter- percentage point to 4 percent on Jan. 30, up from 68 percent odds yesterday.

The central bank will reduce interest rates at every policy-setting meeting ``for the next two to three quarters,'' Pacific Investment Management Co.'s Paul McCulley said in a note released today to clients.

TED Spread

The ``TED'' spread, the difference between what banks and the U.S. government pay for three-month loans, rose to 1.74 percentage points, from 1.53 percentage points yesterday, indicating banks became less willing to lend to each other. The spread was less than half a percentage point before credit markets froze up in August.

Three-month bill yields fell for the first time in six days as investors sought the safety of short-term debt. Yields fell 21 basis points, the most since Nov. 7, to 3.10 percent.

Bhutto, 54, died of injuries sustained in a suicide bomb attack on a rally in Rawalpindi before elections scheduled for January. She had survived an assassination attempt when she returned to Pakistan in October to contest parliamentary elections after eight years of self-imposed exile.

Instability in Pakistan, a nuclear-armed country, is contributing to the gains in Treasuries, said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., in an e-mail message.

Unemployment Insurance

The number of Americans filing first-time claims for unemployment insurance unexpectedly rose by 1,000 to 349,000 in the week that ended Dec. 22. Workers continuing to collect unemployment benefits jumped by 75,000 to 2.713 million, the highest since November 2005, in the week ended Dec. 15, the Labor Department said in Washington.

Durable goods orders rose 0.1 percent last month. The median forecast in a Bloomberg survey was for a 2 percent gain.

``When we get data that confirms the economy is slowing, it's only going to keep a bid in the market,'' said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm.

Treasuries remained higher even as a private report showed consumer confidence unexpectedly increased in December. The Conference Board's index rose to 88.6, from a revised 87.8 during November. The median forecast in a Bloomberg survey was for the gauge to fall to 86.5.

Annual Return

Treasuries have returned 7.6 percent so far in 2007, the most since 2002, according to an index compiled by Merrill Lynch & Co., as defaulted subprime mortgages sent corporate borrowing costs surging and fed demand for the safest assets.

Notes gained earlier on reports that Citigroup Inc., the biggest U.S. bank, may cut its dividend by 40 percent to ``preserve its capital position,'' according to Goldman Sachs Group Inc. Writedowns at the biggest banks are still likely to be ``significantly larger than investors are anticipating,'' analysts including William F. Tanona wrote in a note to clients yesterday.

The Treasury's $13 billion sale of five-year notes drew a yield of 3.651 percent, less than the 3.668 percent median forecast by eight bond-trading firms surveyed by Bloomberg. For every $1 sold, there was $2.31 worth of bids. For the past 10 sales of the same amount, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, averaged $2.49.

Indirect bidders, the class of investors that includes foreign central banks, bought 28.6 percent of the securities, the most since September.

The 10-year Treasury yield will decline to 4.03 percent by the end of March, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

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