Treasuries Advance on Concern Credit-Market Losses Will Worsen

By Sandra Hernandez and Daniel Kruger

June 26 (Bloomberg) -- Treasuries rose, pushing yields on two-year notes to the lowest level in almost three weeks, on concern that credit-market losses will worsen, preventing the Federal Reserve from increasing borrowing costs later this year.

The rally began as traders sought the relative safety of government debt amid speculation Chrysler LLC may seek protection from creditors, which the company denied. Goldman Sachs Group Inc. said Citigroup Inc., the biggest U.S. bank, may take an additional $8.9 billion in writedowns in the second quarter. U.S. stocks tumbled. Investors snapped up $20 billion of five-year notes the government auctioned.

``Everybody's like a cat on a hot tin roof,'' said E. Craig Coats Jr., co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York. ``There's a lot of fear and uncertainty out there.''

The yield on the two-year note, more sensitive to monetary policy than longer-term securities, fell 12 basis points, or 0.12 percentage point, to 2.69 percent at 1:20 p.m. in New York, according to BGCantor Market Data. The price of the 2.875 percent security due in June 2010 rose 7/32, or $2.19 per $1,000 face amount, to 100 11/32.

The 10-year note's yield declined 6 basis points to 4.04 percent, after earlier touching 4.04 percent.

Five-year notes gained, pushing yields down to 3.42 percent, after the U.S. Treasury sold $20 billion of five-years maturing in June 2013 at a yield of 3.44 percent. That was lower than the 3.461 percent traders forecast. The bid/cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, rose to 2.48 from 1.84 at the last five-year note sale, indicating stronger demand.

`Economic Headwinds'

``People who thought the Fed would raise rates now think they're more likely to hold steady; some have even said they expect them to cut,'' said Brant Carter, managing director of retail trading for government and agency bonds in Memphis, Tennessee, at the brokerage Morgan Keegan Inc. ``I'm bullish.''

The Fed left its benchmark interest rate at 2 percent yesterday, halting a series of seven cuts since September, and said higher energy prices and a housing-market slump may hamper economic growth.

The U.S. economy expanded at an annual rate of 1 percent in the first quarter, capping the weakest six months of growth in five years, the Commerce Department said today.

More Americans than forecast filed first-time applications for unemployment benefits last week. Initial jobless claims totaled 384,000 in the week ended June 21, the Labor Department said. Economists in a Bloomberg News survey forecast they'd fall to 375,000 from a previously reported 381,000 a week earlier.

``These are some of the steepest economic headwinds we've seen since the '70s,'' said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co., a brokerage for institutional investors in New York. ``You should consider buying bonds on any kind of dips.''

`Psychological Number'

Treasuries remained higher after the National Association of Realtors said sales of previously owned homes in the U.S. rose in May from a record low. Resales increased 2 percent to a 4.99 million annual rate, higher than forecast, from a 4.89 million pace in April, the group said.

``Had it gone over 5 million, that could have been a psychological number that could have negatively affected bond prices,'' Carter said. ``Initial jobless claims being up shows there are people being laid off, and that's going to continue.''

Goldman lowered its rating on U.S. brokerages to ``neutral'' from ``attractive,'' saying the pace of deterioration in the industry ``appears to be far worse than'' it originally anticipated, according to a June 25 note.

`Flight to Quality'

Banks and securities firms worldwide have posted $400 billion in asset writedowns and credit losses stemming from the U.S. subprime-mortgage market since the start of 2007, according to data compiled by Bloomberg News.

U.S. stocks retreated, sending the Dow Jones Industrial Average to its lowest level since September 2006. The Dow fell 1.9 percent.

``Today's trade is weaker financial stocks and a flight to quality,'' said Andrew Brenner, co-head of structured products in New York at MF Global Ltd.

Two-year notes yield 0.72 percentage point more than the Fed's 2 percent target rate. The yield has been an average of 0.46 percentage points below the central bank's rate this year.

The current differential ``is not so bad in a time of uncertainty,'' said Coats, of Keefe, Bruyette & Woods.

Quarterly Loss

Government debt is still headed for the biggest quarterly loss in four years because of speculation in past weeks that the Fed plans to raise borrowing costs to keep inflation in check.

Treasuries fell 2.9 percent so far this quarter, according to Merrill Lynch's U.S. Treasury Master Index, the most since the April-to-June period of 2004. They have returned 1.3 percent so far this year.

Futures contracts on the Chicago Board of Trade show traders see an 89 percent chance the Fed will raise its benchmark at least a quarter-percentage point by year-end, compared with 54 percent a month ago. The likelihood policy makers will increase the rate at its next meeting in August is 22 percent, down from 36 percent yesterday.

Provided by:
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CFSB
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E-mail: Chichi@mortgage-hawaii.com

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