Tags: mortgage | Treasurys | unemployment | prices

Treasurys Trail Behind Mortgages as Fed Seen Reducing Purchases

Wednesday, 18 September 2013 06:47 AM

Treasurys are lagging behind mortgage-backed securities this quarter by the most since the start of 2012 amid speculation the Federal Reserve will today announce plans to trim its government-debt purchases.

U.S. sovereign securities have fallen 1.1 percent since the end of June, versus a 0.4 percent decline for mortgage bonds, based on Bank of America Merrill Lynch indexes. Among 64 economists surveyed by Bloomberg News, 33 predict the Fed will say it will reduce buying of Treasurys by $5 billion or less, with 31 forecasting a cut of $10 billion or more. The median estimate is for mortgage-bond buying to remain at $40 billion, the survey shows.

“We think $10 billion is the most likely outcome, that’s probably entirely in U.S Treasurys,” said Andrew Wilson, head of fixed income at Goldman Sachs Asset Management in London, speaking to Francine Lacqua on Bloomberg Television’s “On the Move” program. “There’s certainly job creation happening and that’s what the Fed had mentioned initially.”

The benchmark 10-year yield was little changed at 2.85 percent at 6:16 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.5 percent note maturing in August 2023 was 97.

While the Fed’s purchases of Treasurys and mortgage bonds aim to support the economy by anchoring borrowing costs, the decision to buy debt backed by home loans specifically attempts to boost the housing market. A drop in demand for home loans argues against a cut to those mortgage-bond purchases.

Mortgage Costs

The average cost on 30-year fixed-rate mortgages has risen to 4.57 percent after dropping to a record low of 3.31 percent in November, according to Freddie Mac.

Mortgage application data for the week ending Sept. 13 is due today, following a 13.5 percent decline in the previous seven days, the most since October 2011. Housing starts rose in August from the previous month, according to a Bloomberg survey of economists before today’s Commerce Department report.

“It will be difficult to expect Treasurys to rally” as the central bank trims purchases, said Yoshiyuki Suzuki, who helps oversee the equivalent of $57.4 billion as fixed-income head at Fukoku Mutual Life Insurance Co. in Tokyo. Buying of mortgage-backed securities will continue because “the Fed may fear that mortgage rates are rising very rapidly. They don’t want to kill the market,” he said.

Fed Tapering

Ten-year yields that rose above 3 percent to a two-year high this month not only reflect forecasts for Fed tapering, they also indicate investors are preparing for the central bank to raise its main interest rate, said Will Tseng, a bond trader at Mirae Asset Global Investments in Taipei.

The Fed has pledged to keep interest rates near zero as long as the jobless rate remains above 6.5 percent and the inflation outlook doesn’t exceed 2.5 percent. Unemployment was 7.3 percent in August, and the central bank’s preferred measure of cost increases in the economy was at 1.4 percent in July.

The central bank will release its economic projections out until 2016 today, including the outlook for the benchmark rate.

“We see the Fed’s updated guidance on the Fed funds rate as more relevant and expect guidance to be shifted out in some form,” Citigroup Inc. analysts including Peter Goves in London, wrote in a note to clients. “We therefore maintain a bias for lower yields, especially in the front-end of the curve.”

Treasury 10-year notes advanced for a fifth day yesterday, the longest streak of gains in almost a year, on speculation low inflation will give the Fed more flexibility to reduce stimulus. A Labor Department report yesterday showed the consumer-price index rose 0.1 percent in August, the least in three months.

Foreign Ownership

China, the largest foreign lender to the U.S., increased its holdings of Treasurys by 0.1 percent in July to $1.277 trillion, according to Treasury Department data released yesterday. Treasurys held by Japanese investors, who have the second-largest stake in U.S. government debt, rose to a record $1.135 trillion.

China faces rising risks in holding Treasurys, Zhang Monan, a researcher at the State Information Center under the National Development and Reform Commission, wrote in the China Securities Journal. The holdings aren’t safe and China “must” change the situation of holding “too much” U.S. government securities, Zhang wrote.

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Treasurys are lagging behind mortgage-backed securities this quarter by the most since the start of 2012 amid speculation the Federal Reserve will today announce plans to trim its government-debt purchases.
Wednesday, 18 September 2013 06:47 AM
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