Japan, China and Taiwan sold U.S. Treasuries at the fastest pace in at least five years in August as losses linked to U.S. subprime mortgages sparked a slump in the dollar.
Japan cut its holdings by 4 percent to $586 billion, the most since a new benchmark for the data was created in March 2000, Treasury Department figures published yesterday showed. China’s ownership of U.S. government bonds fell by 2.2 percent to $400 billion, the fastest pace since April 2002. Taiwan’s slid 8.9 percent to $52 billion, the most since October 2000.
Asia’s dumping of Treasuries exacerbated the biggest sell- off in U.S. financial assets since Russia defaulted in 1998. The dollar has declined by 7.2 percent this year to a record low against the euro as the Federal Reserve cut interest rates last month to support the housing market, reducing the yield advantage of U.S. fixed income assets.
“People are concerned about the U.S. dollar falling,” said Hiromasa Nakamura, who helps oversee the equivalent of $25.7 billion at Mizuho Asset Management Co. in Tokyo. “The Fed will continue to cut rates and the dollar may fall for three to six months.”
The dollar fell to 116.82 yen at 11:16 a.m. in London, 116.92 late in New York yesterday and traded at $1.4171 per euro, close to a record low of $1.4283.
Sovereign Wealth Funds
The cutback on Treasuries came as China and South Korea joined Singapore and Norway in setting up so-called sovereign wealth funds to invest excess foreign-exchange reserves from export revenue to improve returns.
“Asian central banks are becoming more conscious of increasing returns,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “We’re seeing moves to create sovereign wealth funds, which by definition suggest a structural shift away from Treasuries.”
Any gains in the dollar are a “selling opportunity,” Rennie said. The dollar may fall to $1.44 against the euro and 115 yen at the end of the year, he said.
Ten-year Treasury yields declined almost 2 basis points to 4.64 percent, according to bond broker Cantor Fitzgerald LP. The yield will decline to 4.53 percent by year-end, according to a Bloomberg News survey of economists, with the most recent forecasts given the heaviest weightings.
Agency Bonds
Any claims that China is dumping U.S. assets are “spurious” because the nation had also raised its purchases of U.S. agency debt, according to an Oct. 16 report by Win Thin, currency strategist at Brown Brothers Harriman in New York.
China bought an extra $2.7 billion of agency bonds in August, adding to $65.7 billion net purchases of those securities since June 2006, Win said.
“The data supports our view that diversification does not automatically mean outright dollar sales,” he said. While China may be diversifying its new reserves, “it is still a net buyer of dollars but maybe just a smaller share.”
China’s $200 billion fund known as China Investment Corp., whose investments include a 9.4 percent stake in Blackstone Group LP, will invest based on returns, Chairman Lou Jiwei told reporters in Beijing yesterday.
The decline is Treasuries holding is “a reflection of diversification into higher-yielding assets from Treasuries,” said Craig Chan, a Singapore-based strategist at Lehman Brothers Holdings Inc. “The dollar’s weakness is also a factor in play.”
Stocks, Treasuries
The five biggest Asian holders, which include South Korea and Hong Kong, trimmed holdings by 3.6 percent to $1.14 trillion, or 51 percent of all foreign investment in U.S. government debt, the Treasury Department said.
Total holdings of equities, notes and bonds fell a net $69.3 billion in August after an increase of $19.2 billion in July, the Treasury Department said. None of the dozen economists surveyed by Bloomberg News predicted the decline, the first since Russia defaulted in 1998.
“They were for the month of August, a month of quite some market turmoil, therefore I don’t think they were particularly surprising,” Robert Kimmitt, Deputy Treasury Secretary said in Berlin today. “Any prudent investor with a diversified portfolio is going to want to have U.S. securities. That would be true also for sovereign wealth funds.”
Treasuries have returned 4.5 percent this year, heading for the best gain since 2002, as the U.S. central bank switched its focus to supporting growth from curbing inflation, according to indexes compiled by Merrill Lynch & Co.
The Fed on Sept. 18 cut its overnight rate for loans between banks to 4.75 percent from 5.25 percent to avoid a recession. Fed Chairman Ben S. Bernanke said this week that markets have strengthened since August, though a full recovery “is likely to take some time.”
To contact the reporter on this story: David Yong in Kuala Lumpur at dyong@bloomberg.net ; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To view the original article, click here.
Posted by bondsblog as International Markets at 7:29 AM EDT
No Comments »
European two-year notes fell after European Central Bank policy makers said the euro region’s economy will continue to expand and inflation risks remain.
Bonds are extending a decline last week when a stronger- than-forecast U.S. jobs report prompted traders to reduce bets on further interest-rate cuts by the Federal Reserve. European Central Bank executive board member Lorenzo Bini Smaghi said the euro region will grow more than the U.S. this year and “maybe” also in 2008, according to Italian newspaper La Stampa.
“We see a rate cut as highly unlikely,” said James Nixon, a European economist at Societe Generale SA in London. “We expect the ECB to keep rates unchanged until at least the spring of next year, before raising them again.”
The two-year note yielded 4.04 percent, up 1 basis points from Oct. 5, as of 1:09 p.m. in London. The price of the 4 percent security maturing in 2009 fell 0.19, or 19 euro cents per 1,000-euro ($1,409) face amount, to 99.93.
The yield on the 10-year German bund was little changed at 4.35 percent.
The yield spread, or difference, between the 2-and the 10- year bonds narrowed to 31 basis points, from 33 on Oct. 5. The flatter yield curve suggests investors may have become more optimistic about the economy in the near-term.
European bonds also fell after a report showed optimism among German investors for the euro area was higher than expected this month. An index compiled by Limberg-based Sentix dropped to 15.3, from 18.1 in September. Economists surveyed by Bloomberg News had predicted a reading of 14.
Bunds recouped some of their losses after German manufacturing orders rebounded less than expected in August from the biggest drop in at least 16 years.
Orders, adjusted for seasonal swings and inflation, rose 1.2 percent last month, compared with 2.2 percent forecast by economists in a Bloomberg survey. Orders dropped 7.1 percent in July, according to the Economy and Technology Ministry in Berlin.
ECB’s Comments
Bini Smaghi told La Stampa the ECB is working to “ensure the growth conditions” after the market turmoil caused by the collapse of the U.S. subprime mortgage market.
ECB council member Erkki Liikanen said today in Helsinki there’s still a risk that inflation will accelerate as the euro- region economy continues to expand.
“Price stability is still subject to upside risks in the medium term,” Liikanen, who also heads Finland’s central bank, said in a report released in Helsinki today. “Economic fundamentals point to favorable prospects for growth in the medium term.”
The European Central Bank kept its main interest rate at 4 percent on Oct. 4 as a strengthening euro and slump in U.S. housing threaten to curb U.S. economic growth.
Rate Futures
The implied yield on the three-month Euribor futures contract for December was unchanged at 4.59 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB’s key rate since 1999 until recently.
The spread has widened to 71 basis points on average since August, when the financial market turmoil resulted in a credit squeeze.
U.S. Treasuries outperformed European bonds after the comments from ECB policy makers on speculation that the euro- region economy might be more resilient than previously thought. The extra yield that investors get from holding a 10-year U.S. bond over the German bund fell to 27 basis points from 29 basis points on Oct. 5.
Bonds may decline further ahead of an increase in supply this week. Austria will sell 1.1 billion euros of a 3.50 percent bond maturing in 2015 tomorrow and Germany seeks to raise 6 billion euros from a sale of its two-year notes on Oct. 10.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
To view the original article, click here.
Posted by bondsblog as International Markets at 7:41 AM EDT
No Comments »
Emerging sovereign debt spreads tightened 10 basis points on Thursday as investors were encouraged to take on risk by a positive Wall Street performance and hopes for an interest-rate cut by the U.S. Federal Reserve next week.
Bonds issued by oil exporters like Venezuela and Ecuador received an additional boost as U.S. crude prices closed above $80 a barrel after hitting an all-time high of $80.20 during the session.
Trading volumes were still thin, however, because many investors prefer to wait until the Fed’s monetary policy meeting on Tuesday to build new positions.
“The debt market has thin volumes today; we are basically following the trend of other markets,” said Luiz Felipe Brandao, emerging markets director at Arkhe brokerage in Sao Paulo.
“Investors are on the sidelines given the uncertainties about the Fed, which will only dissipate next week,” he added.
Economists forecast the Fed will cut its benchmark federal funds rate by at least a quarter of a percentage point on Sept. 18 to protect the economy from a global credit squeeze.
Such expectations have been supporting investor appetite for high-yielding, riskier assets.
Emerging debt yield spreads over U.S. Treasury notes, a key gauge of risk aversion, tightened 10 basis points to 223 basis points, according to the JP Morgan EMBI+ index.
Brazil’s global bond due 2040, the most liquid emerging market paper, gained a quarter point in price to be bid 132.813, while yields paid on the paper fell to 5.774 percent. Bond yields move inversely to prices.
Brazil’s local interest rates rose, however, after minutes of the central bank’s latest monetary policy meeting showed policy-makers considered the possibility of halting its rate-cut campaign last week, as inflation picked up. At the end of the meeting, however, the bank decided to cut its Selic rate by 25 basis points.
Brazil’s interest-rate futures for January 2009; the most liquid contract at the Mercantile & Futures Exchange, rose to 11.56 percent from 11.49 percent.
Higher oil prices drove Venezuelan and Ecuadorean bonds higher for the second consecutive session. Venezuela’s benchmark global bond due 2027 soared 1.937 points in price to 100.500 while Ecuador’s global bonds due 2030 jumped 1.5 points to be bid 88.500.
Turkey’s benchmark global bond due 2030 gained 0.625 point in price, bid at 154.000, after the central bank surprised investors with a 25-basis-point interest rate cut. No one in a Reuters poll of 17 institutions had forecast a cut, and the majority expected the first reduction only in October.
The central bank decision came after data showed the Turkish economy grew only 3.9 percent in the second quarter, below a year-end government target of 5 percent.
Courtesy: Reuters
By Walter Brandimarte
To view the original article, click here.
Posted by bondsblog as International Markets at 7:48 AM EDT
No Comments »
