By Liz Capo McCormick
Nov. 29 (Bloomberg) -- Treasuries gained the most in November since Ronald Reagan was in the White House, in a month that saw voters elect Democrat Barack Obama president and the U.S. government pledge to spend up to $800 billion more to unfreeze credit markets.
Yields on 10- and 30-year U.S. debt touched record lows as investors piled into longer-dated securities on speculation the shrinking economy will subdue inflation. Reports showed durable- goods orders fell more than double the pace forecast, consumer spending dropped the most since 2001 and the economy contracted in the third quarter more than estimated. The cost of living decreased the most on record, a Nov. 19 report showed.
“There is a weak economy with inflation on the backslide now,” said Kevin Giddis, head of fixed-income sales, trading and research at the brokerage Morgan Keegan Inc. in Memphis, Tennessee. “It is a lot easier to buy longer-term Treasuries. You can see easily another 30-basis-point drop in the 10-year yield just on the inflation outlook alone.”
The yield on the 10-year note plummeted 31 basis points, or 0.31 percentage point, this week to 2.93 percent, according to BGCantor Market Data. It touched 2.90 percent yesterday, the lowest since the Federal Reserve’s daily records on the note began in 1962, and since 1958 on a monthly basis. The 3.75 percent security due in November 2018 climbed 2 22/32, or $26.88 per $1,000 face amount, to 107 2/32.
The 30-year bond’s yield tumbled 27 basis points for the week to 3.44 percent. It touched 3.43 percent yesterday, the lowest since regular sales of the security started in 1977.
The two-year note’s yield fell 12 basis points to 0.98 percent, down from 1.1 percent the prior week and from 1.55 percent at the end of October. It touched 0.95 percent on Nov. 20, the lowest since regular sales began in 1975.
Most Since 1981
Treasuries returned 5.07 percent this month, Merrill Lynch & Co. indexes showed. It was the most since October 1981, when former Fed Chairman Paul Volcker was battling to tame inflation that was running at more than 10 percent. Obama on Nov. 26 appointed Volcker, 81, to head a new White House economic board that will propose ways to revive growth.
The difference in yield, or spread, between two- and 10- year notes narrowed for the second week, reaching 1.94 percentage points. The so-called yield curve was at 2.62 percentage points on Nov. 13, a five-year high.
The Consumer Price Index fell 1 percent last month, the Labor Department said this week. Gross domestic product slid an annualized 0.5 percent in the third quarter, more than initially estimated, the Commerce Department said. Orders for durable goods fell by 6.2 percent in October, the Census Bureau said.
Deflation Factor
The reports, and an S&P/Case-Shiller home-price index reading showing that the decline in home prices accelerated, signaled credit markets remain locked. They also raised the possibility of a downward spiral as lenders cut back credit, causing spending to tumble and companies to slash investments and payrolls.
“The primary driver behind the fall in Treasury yields this month was the deterioration in the economy and the sinking realization that deflation could be a factor of life going forward,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 17 primary dealers that trade government securities with U.S. central bank. “You put everything together and 10-year and 30-year Treasuries provided a lot of value.”
Supply Issue
Bonds also rallied this week after the U.S. announced a plan to buy as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. The plans spurred demand for Treasuries as a replacement for bonds backed by home loans that now may be repaid early as mortgage rates decrease.
The government also will set up a $200 billion program to support consumer and small-business loans.
Investors seeking the safest assets kept yields on three- month Treasury bills yesterday at 0.04 percent, where they have been since Nov. 26. The yields dropped to 0.01 percent on Nov. 21, the lowest level since the 1940s, according to monthly figures from the central bank.
“The only thing negative for the bond market is the supply itself that the Treasury is going to keep having to bring in to fund its initiatives,” Morgan Keegan’s Giddis said. “It’s almost counterbalanced by the favorable conditions that keep people from walking away from the Treasury market.”
The U.S. government pledged $306 billion this week in guarantees for troubled mortgages and toxic assets of Citigroup Inc. to stabilize the bank after its stock plunged 83 percent this year. Citigroup also will get a $20 billion cash injection from the Treasury, adding to the $25 billion the company received last month under the Troubled Asset Relief Program.
Non-Farm Payrolls
Futures on the Chicago Board of Trade showed 68 percent odds the Fed will lower its 1 percent target rate for overnight lending between banks by a half-percentage point at its Dec. 16 meeting, and a 32 percent probability of a three-quarter- percentage point cut.
Non-farm payrolls shed 320,000 jobs in November, compared with a drop of 240,000 jobs the previous month, according to the median forecast in a Bloomberg News survey of economists. The Labor Department is scheduled to release the report Dec. 5.
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.
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