Brian Edmonds Comments: Treasury Two-Year Yields Match Record Low As Stocks Fluctuate

July 19, 2010, Bloomberg BusinessWeek

U.S. two-year note yields matched a record low as stocks fluctuated and data showed builders in the U.S. turned more pessimistic in July than forecast.

Treasury yields rose to session highs earlier on a rally in stocks. An index of home-builder confidence fell to the lowest level in 15 months, adding to signs the housing market’s recovery will be slow. Federal Reserve Chairman Ben S. Bernanke is scheduled to give his semiannual report on the economy to Congress this week.

“The equities market is not holding up that well,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 18 primary dealers that trade with the Fed. “Housing will still be a drag on the economy. People will be meandering around until we get Bernanke’s testimony.”

The two-year note yield increased less than 1 basis point, or 0.01 percentage point, to 0.59 percent at 12:17 p.m. in New York, according to BGCantor Market Data. It touched 0.5765 percent, tying the record low set July 16. The 0.625 percent security due in June 2012 traded at 100 2/32.

The 10-year note yield advanced 1 basis point, reaching 2.94 percent.

The Standard & Poor’s 500 Index fell as much as 0.4 percent after rising 0.7 percent. It tumbled 2.9 percent on July 16.

Housing Starts

Other reports this week are expected to show U.S. housing starts fell and the outlook for economic growth declined.

The housing data could prove to be “the next litmus test for economic sentiment,” depending on other developments, Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients.

U.S. central bankers at a policy meeting last month lowered their forecast for 2010 growth to 3 percent to 3.5 percent, from 3.2 percent to 3.7 percent, according to minutes issued last week. Gross domestic product contracted 2.4 percent last year.

‘Exceedingly Rare’

“Double-dip recessions are exceedingly rare,” Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “The only major catalyst we see that could risk a double dip at this point would be a second round of banking crisis, but that scenario seems unlikely given market conditions and Fed support of the banking system.”

Bernanke is scheduled to report on the economy to the Senate on July 21 and the House of Representatives the next day.

“Look for questions on deflation and double-dips -- words that have seemingly overnight become part of popular vernacular,” Tom Porcelli, senior economist in New York at primary dealer Royal Bank of Canada, wrote in a note to clients. “While the chairman is likely to strike a dovish tone, we don’t expect he’ll make significant waves, either.”

Minutes of the Fed’s June meeting released July 14 showed policy makers lowered their outlook for inflation this year to a range of 1 percent to 1.1 percent, from 1.2 percent to 1.5 percent in April. A few officials expressed concern about “some risk of deflation,” according to the minutes.

Chinese Holdings

China should reduce its U.S. dollar assets, Yu Yongding, a former adviser to the Chinese central bank, wrote in a commentary published in today’s China Securities Journal.

The proportion of dollar assets in China’s reserves is too high, Yu wrote. When demand for Treasuries is high, it will offer China a “rare opportunity” to cut holdings, Yu wrote. China is America’s largest creditor, owning $867.7 billion of the $8.1 trillion in publicly traded debt.

The combination of the slowest U.S. inflation rate in four decades and concern that the global recovery will falter is bolstering the case for lower yields. Consumer prices excluding energy and food remained at a 44-year low of 0.9 percent in June, the Labor Department reported July 16.

For the first time since the government started collecting the data, central banks, mutual funds and U.S. banks are buying more government securities at Treasury auctions than Wall Street’s bond dealers.

Foreign and domestic investors bidding directly at note and bond auctions bought 57 percent of the $1.26 trillion in Treasuries sold by the government this year, up from 45 percent during the same period in 2009 and as little as 32 percent for all of 2008, according to government data compiled by Bloomberg.