Treasuries Advance, Head for Second Weekly Gain, on CIT Concern

By Theresa Barraclough and Anchalee Worrachate

Oct. 2 (Bloomberg) -- Treasuries rose, heading for a second weekly gain, after CIT Group Inc. said it may file for bankruptcy protection if a planned debt exchange fails.

Ten-year yields fell to the lowest level since May on concern the 101-year-old commercial lender will fail to cut debt and raise capital after posting more than $5 billion in losses over the past nine quarters. Treasuries also advanced before U.S. reports today that economists said will show the jobless rate rose to a 26-year high and growth in factory orders stalled, adding to signs the recovery is losing momentum.

“CIT’s collapse is unavoidable,” said Satoshi Okumoto, who helps oversee about $61.8 billion in assets as general manager at Fukoku Mutual Life Insurance Co. in Tokyo. “CIT has a lot of exposure to the U.S. economy so its collapse will be bad. Treasuries are quite a safe place for the time being.”

The benchmark 10-year yield fell two basis points to 3.16 percent as of 8:43 a.m. in London, according to BGCantor Market Data. The 3.625 percent security rose 4/32, or $1.25 per $1,000 face amount, to 103 28/32. The yield, which has declined 15 basis points this week, earlier fell to 3.14 percent, the lowest since May 18.

CIT is asking bondholders to swap unsecured notes for new secured debt or shares or a combination of the two, the New York-based company said. The swaps can’t be completed unless the company reduces its debt by $5.7 billion, it said. CIT said it may choose to file for Chapter 11 if it doesn’t meet the target.

Default Swaps

Investors are paying more to protect CIT debt from default, signaling traders were bracing for bankruptcy. Credit-default swaps protecting against a CIT default through Dec. 20 have jumped 5 percentage points the past two days to 27 percent upfront, according to CMA DataVision.

The U.S. jobless rate climbed to 9.8 percent in September, the highest since 1983, from 9.7 percent in August, according to the median estimate of economists surveyed by Bloomberg News. Payrolls declined by 175,000 workers, a separate survey showed. Orders at factories were unchanged in August, after rising 1.3 percent the prior month, according to another survey.

The U.S. expansion may not be strong enough to “substantially” bring down unemployment, Federal Reserve Chairman Ben S. Bernanke said yesterday, indicating the central bank may take time to drain the trillions of dollars it has pumped into the economy.

‘Extended Period’

Fed Vice Chairman Donald Kohn said on Sept. 30 that tight credit, low inflation and slack demand for labor and products mean the central bank can keep interest rates at around zero “for an extended period.”

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was at 1.71 percentage points today. The spread was as wide as 2.13 percentage points in June.

Fed Bank of Boston President Eric Rosengren will speak on inflation and markets at a forum today in Boston.

Futures on the Chicago Board of Trade show a 2 percent chance the Fed will increase its target rate for overnight lending between banks by December, compared with 2.5 percent odds a month earlier. The Fed cut its target for overnight loans between banks to a range of zero to 0.25 percent in December.

“The earliest the Fed can raise interest rates is the end of next year,” Daiwa SB’s Katayama said.

Annual Loss

Treasuries have handed investors a loss this year as President Barack Obama pushed the nation’s marketable debt to an unprecedented $6.94 trillion to spur economic growth. Holders have incurred a loss of 1.9 percent since December, according to Merrill Lynch & Co.’s Treasury Master Index.

“We expect to continue to incrementally and gradually increase nominal coupon issuance over the next nine months to extend the average maturity of the overall marketable debt portfolio,” Karthik Ramanathan, the Treasury’s acting assistant secretary for financial markets said yesterday in Boston.

The department issued almost $1.7 trillion in gross securities through 291 auctions in the fiscal year that ended Sept. 30, Ramanathan said.

The Treasury announced yesterday plans to sell $39 billion in three-year notes, $20 billion in 10-year debt, $12 billion in 30-year bonds and $7 billion of 10-year TIPS over four consecutive days next week.

The government last sold this combination of securities the week of July 6, when it auctioned $73 billion. That was the first time the Treasury offered four coupon-bearing securities in a single week since it began regular debt sales in 1976.

Stocks Fall

Demand for Treasuries also waned as Asian stocks fell for a second day after U.S. equities tumbled the most in three months yesterday. The MSCI Asia Pacific Index of regional shares lost 2.1 percent after the Standard & Poor’s 500 Index slid 2.6 percent.

“Waning risk appetite helped underpin a bid and a two- and 10-year bull flattener,” Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney, wrote in a report today. A bull flattener refers to a situation when yields on longer-maturity debt fall at a faster pace than those on short-maturity notes, reducing the difference between the two.

The spread between two- and 10-year yields was 2.30 percentage points today, near a four-month low of 2.27 percentage points reached on Sept. 29, according to data compiled by Bloomberg.

To contact the reporter on this story: Anchalee Worrachate in London at Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.