Treasuries Show No Lost Appetite With Dollar Declines

By Liz Capo McCormick and Daniel Kruger

Oct. 19 (Bloomberg) -- Investors can’t get enough Treasuries even as the U.S. budget deficit climbs beyond $1 trillion, the government sells a record amount of debt and the dollar declines to the weakest level since August 2008.

Foreign buyers increased their holdings for a fourth consecutive month in August, to an all-time high of $3.45 trillion, according to Treasury Department data released Oct. 16. U.S. demand is being spurred by a rising savings rate and concern the economic recovery may falter. Fixed-income funds have attracted 18 times more money than stock funds this year, according to data compiled by Morningstar Inc. and Bloomberg.

Bond investors see no reason to abandon Treasuries with the Federal Reserve likely to keep interest rates on hold until at least the second half of 2010. The 15 percent drop in Intercontinental Exchange Inc.’s U.S. Dollar Index from its high this year on March 4 means international investors can buy U.S. debt more cheaply without worrying that speculation about interest rates will boost volatility and erode returns.

“The same yield is more attractive” to foreigners because of the weaker greenback, said Todd White, who oversees government debt trading in Minneapolis at RiverSource Investments, which manages $90 billion of bonds.

International investors owned $3.45 trillion of Treasuries in August, up from $3.08 trillion in December. China, the biggest foreign holder of U.S. government debt, with $797.1 billion, shifted purchases from bills to notes and bonds, buying $15.3 billion in so-called coupon securities in August, government data showed. It owned $727.4 billion in December.

‘Most Liquid Markets’

“The U.S. continues to provide one of the deepest and most liquid markets available for investing,” said Wan-Chong Kung, who helps oversee $89 billion as a portfolio manager in Minneapolis at FAF Advisors, a unit of U.S. Bancorp.

Investors outside the U.S. bought 44 percent of the $1.6 trillion of notes and bonds sold by the President Barack Obama’s and Treasury Secretary Timothy Geithner this year, compared with 27 percent of the $631 billion issued at this point in 2008, government figures show. Barclays Plc, one of the 18 primary dealers that trade with the Fed, forecasts issuance to climb to a record $2.1 trillion this year, and $2.5 trillion in 2010.

Rising demand at Treasury auctions has helped to push the yield on the benchmark 10-year note down from this year’s high of 4 percent on June 11 to 3.41 percent on Oct. 16. Indirect bidders, an investor class that includes central banks, bought 47.4 percent of the $20 billion of 10-year notes sold Oct. 7, compared with an average of 32.7 percent for the past 10 sales.

Not So ‘Terrible’

Purchases rose even as after Merrill Lynch & Co.’s Treasury Master Index of U.S. bonds fell 4.46 percent between December and the end of June, the worst first half on record. The index has gained 1.46 percent since mid-year.

The weakening of the dollar is “terrible news for practically all of the rest of the world’s economies,” except the U.S. and China, Harvard University Professor Niall Ferguson said in an Oct. 16 interview on Bloomberg Radio. China, which manages the yuan’s appreciation, will “intervene to make sure the dollar does not weaken” relative to its currency, added Ferguson, author of “The Ascent of Money: A Financial History of the World.”

The greenback will end the year at $1.50 per euro, compared with $1.4857 today, according to the median estimate of 43 forecasters in a Bloomberg survey. Against the yen, the dollar is projected to finish the year at 90 versus 90.98.

‘Settle Down’

Yields on 10-year notes have moved between 3.1 percent and 3.89 percent since June, less than 50 percent of the range in the first half, amid speculation the Fed won’t raise rates before mid-2010. Citigroup Inc. and Societe General SA are among firms advising investors to use options to bet volatility will fall further. Options give the right to buy or sell a security for a certain amount, the strike price, by a given date.

“We are in the camp that the Fed isn’t going to change policy anytime soon, and therefore feel comfortable selling volatility in the fixed-income market to add yield,” said Tim Freeman, head of U.S. equity derivative sales in New York at Capstone Global Markets LLC, which specializes in volatility trading. “The financial system is beginning to settle down and re-capitalize itself. Volatility across asset classes should continue to come under pressure.”

Fed Chairman Ben S. Bernanke and his fellow policy makers cut the target rate for overnight loans between banks to a range of zero to 0.25 percent at the end of 2008. They will keep the target there until August, when central bankers will boost it to 0.5 percent, according to the median estimate of 47 economists surveyed by Bloomberg from Oct. 1 to Oct. 8.

Recession Relapse

U.S. central bankers doubted the durability of the recovery last month and for the first time signaled they were open to increasing purchases of mortgage bonds to prop up the housing market, minutes of the Federal Open Market Committee’s Sept. 22- 23 meeting released Oct. 14 in Washington showed.

Policy makers considered a relapse into recession a bigger risk than a near-term rise in prices, the minutes showed. They predicted “cautious” consumer spending, business investment and hiring. At the same time, they repeated their pledge to keep borrowing costs low for “an extended period.”

“The economic news, while mixed, still portrays an economy which could fall short of people’s expectations,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The expectations are that growth in 2010 will be less than in the second half of 2009. Inflation is not expected to rise for the near term.”

Pimco Buys Treasuries

The U.S. has lost 7.2 million jobs since the recession began in December 2007, including a 263,000 drop in September payrolls. The difference between yields on 2-year notes and Treasury Inflation Protected Securities of the same maturity, which reflects the outlook among traders for consumer prices through 2011, ended last week at 0.53 percentage point. The rate of inflation rose 2.87 percent on average between 2002 and 2008.

Pacific Investment Management Co., based in Newport Beach, California, and a unit of Munich-based insurer Allianz SE, predicts the economy is in for a sustained period of below- normal growth. Bill Gross, who runs the world’s biggest bond fund at Pimco, bought government-related debt last month and cut mortgage bond holdings to the lowest level since 2005.

He said he was buying longer-maturity Treasuries because of deflation concerns. Gross boosted the $185.7 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other government-linked bonds to 48 percent of assets in September from 25 percent in July, according to Pimco’s Web site. The holdings are the most since August 2004.

Headed Higher

The majority of economists and strategist surveyed by Bloomberg say yields have bottomed and are headed higher. The median of 57 estimates is for the yield on the 10-year Treasury, which helps determined rates on everything from mortgages to corporate bonds, to rise to 4.18 percent by the end of 2010.

The yield would still be less than the average 7.24 percent since 1980.

Increased demand for U.S. debt by banks is also helping keep yields low. The rate of U.S. household savings rose to 5.9 percent in May, compared with 0.8 percent in April 2008.

Buying lower-risk securities, such as Treasuries, allows banks to shore up balance sheets after taking more than $1.6 trillion in writedowns and losses since the start of 2007 by pocketing the difference between overnight borrowing costs and government bond yields.

The spread between the federal funds rate and the 10-year Treasury yield, now at 3.19 percentage points, reached 3.7 percentage points in June, the widest since 2004. The average over the past 20 years is 1.46 percentage points.

Banks Park Cash

Bank holdings of U.S. Treasury and agency securities increased $287 billion, or 25 percent, since the end of 2007 to $1.42 trillion in September, according to Fed data tracked by Bloomberg. In 2006 and 2007, holdings shrunk 2.4 percent to $1.23 trillion.

Even as the Dow Jones Industrial Average rallied last week above 10,000 for the first time in a year, from 6,500 in March, investors have been pouring money into bond funds at a faster pace than stock funds.

A net $254.6 billion was added to bond funds during the first nine months of 2009, compared with $14.5 billion for stock managers, according to Chicago-based Morningstar. Almost $3.45 trillion remains in U.S. money-market accounts, up from about $2.5 trillion in mid-2007, just before the financial crisis intensified, data from Washington-based Investment Company Institute show.

“There is a lot of cash on the sidelines that needs to be put to work with over $3 trillion sitting in money market funds,” said Bret Barker, an interest rate specialist at Metropolitan West Asset Management in Los Angeles, with $25 billion in fixed-income assets.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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Euro Little Changed; Officials May Express Concern Over Gains

By Yasuhiko Seki and Ron Harui

Oct. 19 (Bloomberg) -- The euro traded near its lowest level against the dollar in almost a week on speculation policy makers will sound concern about the European currency’s recent strength at a meeting today.

The 16-nation currency retreated from a 14-month high before talks between euro-area finance ministers in Luxembourg after U.S. equities dropped, curbing demand for higher-yielding assets. The Australian and New Zealand dollars strengthened as a Reserve Bank of Australia official said a move to a “more normal” interest-rate setting was appropriate as the economic outlook improves.

“There is emerging wariness about policy makers’ remarks on the strength of the euro,” said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc.

The euro traded at $1.4911 as of 7:52 a.m. in London, from $1.4905 in New York on Oct. 16, and weakened to $1.4829, the lowest level since Oct. 13. Europe’s single currency rose to $1.4968 on Oct. 15, the strongest since Aug. 13, 2008. The yen was at 90.71 versus the dollar, from 90.89. Japan’s currency traded at 135.28 per euro, from 135.48.

Australia’s dollar rose to 91.92 U.S. cents, from 91.65 cents in New York on Oct. 16, when it touched 92.70 cents, the most since August 2008. New Zealand’s dollar advanced to 74.68 U.S. cents, from 74.08 cents. It reached 74.96 cents last week, the most since July 2008.

Luxembourg meeting

The euro weakened after Luxembourg’s Jean-Claude Juncker, who heads the so-called eurogroup and also serves as his nation’s prime minister, said last week the currency’s gains will be discussed at a gathering of finance ministers today.

“We’ll tell you after the meeting if there’s something new to be said, a kind of extension to the normal poem,” Juncker said last week. “But I guess the poem will stay as the poem was,” adding that “we don’t like excessive volatility in exchange rates and disorderly movements.”

Futures traders reduced bets that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 43,367 on Oct. 13, compared with net longs of 51,045 a week earlier.

Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange.

‘Normal Setting’

The so-called Aussie advanced as Philip Lowe, assistant governor of the RBA, said it was “appropriate” to remove monetary stimulus as the economic outlook improves. RBA Governor Glenn Stevens unexpectedly increased the benchmark rate to 3.25 percent on Oct. 6.

“The Australian economy has turned out to be quite a lot stronger than we thought,” Lowe said at a conference in Sydney today. “It’s entirely appropriate we go back to a more normal setting in monetary policy. And that’s the process that’s under way now.”

Gains in the yen and the dollar may be tempered before reports this week that economists said will show the U.S. housing market improved, damping demand for safer assets.

The National Association of Home Builders/Wells Fargo confidence index rose to 20 in October from 19 in September, a Bloomberg News survey showed before the report is released today. U.S. housing starts rose to an annual rate of 610,000 in September from 598,000 in August, according to a separate Bloomberg survey. The Commerce Department will release the report tomorrow.

Standard & Poor’s 500 Index slipped 0.8 percent on Oct. 16.

Economies Improving

Adding to signs the economy is improving, minutes from a Bank of Japan meeting last month showed board members said the need for emergency credit-easing programs was decreasing as companies were finding it easier to raise funds. The central bank last week raised its evaluation of Japan’s economy for a second month.

“The outlook that economies around the world are recovering is fueling risk-taking sentiment,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “Given that Japanese and U.S. rates are likely to stay very low to support growth, the yen and the dollar will probably be sold as funding currencies.”

Benchmark interest rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3.25 percent in Australia, 2.5 percent in New Zealand and 1 percent in the euro zone.

In carry trades, investors borrow in a nation with low borrowing costs and buy assets in countries where returns are higher. The risk in such trades is that currency market moves will erase profits.

Pound Weakens

The pound declined for the first time in five days against the dollar after the Sunday Times said Bank of England policy maker Adam Posen may support an extension of the bank’s 175 billion pounds ($286 billion) asset-purchase program.

“I’m not worried about overshooting inflation right now,” Posen said, according to the newspaper.

“There are renewed concerns that the BOE may expand its asset-purchase program,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. The pound “is falling because of Posen’s comments.”

The Financial Times reported on Oct. 15 that BOE Markets Director Paul Fisher said the central bank’s bond-buying program may be paused next month so it will have the option “of doing more later.” The BOE is scheduled to hold its Monetary Policy Committee meeting on Nov. 5.

Britain’s currency fell to $1.6287, from $1.6356 on Oct. 16 when it touched $1.64, the highest level since Sept. 23.

Exporter Selling

The yen rose on speculation Japanese exporters took advantage of its recent weakness against the dollar and the euro to bring funds back home.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

“There has been constant selling of the dollar from exporters above 91 yen per dollar,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

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Crude Is Little Changed After Reaching One-Year High Above $79

By Grant Smith and Ann Koh

Oct. 19 (Bloomberg) -- Crude oil was little changed after reaching a one-year high as rising equity markets stoked confidence that energy consumption will rebound.

Oil advanced for an eighth day, its longest winning streak since July, as the dollar weakened against the euro, attracting investors seeking an inflation hedge to crude. U.S. supplies of distillates fuels such as diesel and heating oil fell from a 26- year high in the week ended Oct. 9, the Energy Department reported last week.

“Optimism from equities still seems to be channeling into the oil market,” said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. “There has been an increase in petrol demand, the macro figures have been coming out okay, and the colder winter should help with heating demand.”

Crude oil for November delivery was at $78.70 a barrel, up 17 cents, in after-hours electronic trading on the New York Mercantile Exchange at 10 a.m. London time. Prices earlier rose as much as 52 cents, or 0.7 percent, to $79.05, the highest since Oct. 15, 2008.

The contract, expiring tomorrow, rose 1.2 percent to $78.53 a barrel on Oct. 16 after a report showed U.S. industrial production last month climbed more than economists forecast. The more widely held December contract was at $79.29 a barrel, up 27 cents.

Europe’s Dow Jones Stoxx 600 Index added 0.8 percent at 9:18 a.m. in London. The U.S. currency traded at $1.4926 against the euro, compared with $1.4828 earlier.

Last week, oil futures posted their biggest weekly gain in almost two months after the U.S. Energy Department said gasoline stockpiles fell by 5.2 million barrels.

U.S. Inventories

Oil prices have increased 23 percent in the past three months even as U.S. fuel stockpiles climbed. Prices rose as a recovery in equity markets emboldened investors, and the sliding U.S. dollar prompted buying of commodities.

U.S. distillates supplies, including diesel and heating oil, fell from a 26-year high in the week ended Oct. 9, the Energy Department reported last week. At 170.7 million barrels, they were 30 percent above the five-year average for the period.

“Inventory levels are still relatively high,” said David Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. “Ultimately we’ll see oil prices drifting lower again, maybe even under $70 a barrel, because the market is relatively well supplied.”

Brent crude oil for December settlement rose as much as 47 cents, or 0.6 percent, to $77.46 a barrel on the London-based ICE Futures Europe exchange, and was at $77.19 at 9:35 a.m. London time.

‘Bounce Back’

Reports from the U.S. Department of Energy have had mixed results for refined products, Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut, said in a note to clients. “If this week follows historical trends, we should see a bounce back up in both crude oil imports and in refinery utilization.”

Hedge-fund managers and other large speculators increased their bets on rising oil futures to a nine-month high last week, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 68,836 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 18,830 contracts, or 38 percent, from a week earlier.

“The market is pricing in a very big upturn in demand in order to draw down all that product, and I just think it’s a little optimistic at this point,” said Ben Westmore, an energy and minerals economist at National Australia Bank Ltd. in Melbourne.

To contact the reporters on this story: Ann Koh in Singapore at akoh15@bloomberg.netGrant Smith in London at gsmith52@bloomberg.net

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China May Stumble in Race With Rivals for African Oil

By Carli Lourens and John Duce

Oct. 19 (Bloomberg) -- China’s plans to buy into oil fields in Africa may suffer a third setback in as many months if Exxon Mobil Corp. succeeds in snapping up drilling rights in Ghana, one of the continent’s newest oil nations.

Closely held Kosmos Energy LLC said last week it agreed to sell its stake in Ghana’s Jubilee oil field to Exxon Mobil, which may thwart ambitions in the same area by Cnooc Ltd., the listed arm of China National Offshore Oil Corp. While Ghanaian government officials say the Exxon deal, worth about $4 billion according to a person familiar with the transaction, has not been officially approved, Chinese explorers have hit hurdles since July on other oil deals in Angola and Libya.

At stake is China’s ability to secure fuel for its economy, which expanded 7.9 percent in the second quarter from a year earlier. China’s oil companies in Africa are diversifying from construction projects as a means to gain access to mineral resources, and turning to strategies that include Western deal structures and local banks. In the process, they are competing with some of the world’s biggest oil companies in the U.S. and Europe also seeking resources in the region.

“The Chinese are frustrated that they’re not doing more deals,” said Kobus van der Wath, group managing director of The Beijing Axis, which advises Chinese companies expanding overseas. “The interest, intent and general capacity to do deals is far greater.” He estimates non-financial investments in Africa may climb as high as $3 billion this year, double the 2008 level.

Secure Supplies

Since Chinese Premier Wen Jiabao visited seven African nations in 2006 and promised to double aid, establish a $5 billion investment fund and provide $3 billion in loans, China’s energy companies have announced plans to spend at least $16 billion on oil and gas fields on the continent.

“Chinese oil companies are very keen to gain stakes in large oilfields that are nearing production or are in the development stages,” said Thomas Grieder, a London-based analyst at market intelligence firm IHS Global Insight. “The government is keen to secure long-term supplies.”

China’s economy will need more than 11 million barrels of oil a day in five years, 38 percent more than last year, according to Paul Ting, president of New Jersey-based Paul Ting Energy Vision LLC, a Chinese oil and gas consultant.

On Aug. 27, Cnooc said it will step up exploration and acquisitions to meet fuel demand in China. Chairman Fu Chengyu said the company changed its overseas strategy to focus on taking stakes in ventures rather than buying out companies after failing to acquire Unocal Corp. of the U.S. in 2005.

Cnooc shares in Hong Kong more than doubled over the past year and were at HK$12.24 as of 10:23 a.m. local time today.

Cnooc-Ghana Talks

On Oct. 14, Ghana’s Energy Ministry spokesman Michael Sarpong said Cnooc was in talks with Ghanaian officials, without giving details.

His comment followed a Wall Street Journal report on Oct. 12 that said Cnooc was negotiating with Ghana National Petroleum Corp. to bid for Kosmos’s stake in Jubilee. Xiao Zongwei, a spokesman for Cnooc, declined to comment on the article, which cited unidentified people.

Ghana National Petroleum, known as GNPC, is “still in discussions” with Kosmos to acquire the stake, Thomas Manu, its director of exploration and production, said Oct. 13. “GNPC will acquire the stake and then consider proposals from other companies” to take on as partners, he said.

Further south off Angola, Cnooc’s $1.3 billion bid to buy 20 percent of an oil block from Marathon Oil Corp. may be held up after Marathon said the Angolan government and other partners have rights of first refusal. That bid was announced in July with China Petroleum & Chemical Corp., known as Sinopec.

Sinopec shares in Hong Kong rose 22 percent in the past year and were at HK$7.02 as of 10:25 a.m. local time today.

‘Intense’ Competition

The competition for overseas energy assets is “intense,” Su Shulin, President of Sinopec Group, said in an interview in Beijing Oct. 15. “There are opportunities in overseas acquisitions, but there are also many people looking at them.”

Cnooc’s Xiao declined to comment on reports the deal to sell Marathon Oil’s stake to Cnooc and Sinopec has been delayed by Angola’s government. Huang Wensheng, spokesman for Sinopec, said the company has no information on whether Angola has blocked the deal and declined to comment further.

Separately, Libya vetoed a C$499 million ($482 million) bid last month by China National Petroleum Corp., the Asian nation’s biggest oil and gas company, for Calgary-based Verenex Energy Inc., which has stakes in the North African country.

China National Offshore Oil expressed interest in Tullow Oil Plc’s oil finds in Uganda as the U.K. explorer with the most licenses in Africa started compiling a short list of potential bidders for a stake in a project in the country.

Lake Albert

Tullow said Sept. 17 the Ngassa oil field in Uganda may be the largest discovery in the Lake Albert Rift Basin. The Chinese explorer is interested in investing in the project, according to Brian Glover, Tullow Uganda’s country manager.

Tullow said about 10 companies had pre-qualified to work on the field. He was commenting after Dow Jones on Oct. 2 cited an unnamed official at Ugandan President Yoweri Museveni’s office saying Cnooc had held talks with Uganda on joining a project. Tamale Mirundi, a spokesman for Museveni, would neither confirm nor deny talks, while Cnooc’s Xiao declined to comment.

In West Africa, China Petrochemical Corp., or Sinopec Group, the nation’s second-largest oil company, acquired Swiss-based Addax Petroleum Corp. this year for C$8.3 billion ($8 billion), adding oil reserves in Nigeria, Cameroon and Gabon.

China National Offshore Oil is also among companies in talks to buy 16 production licenses in the West African nation, Olusegun Adeniyi, a spokesman for Nigeria’s President Umaru Yar’Adua, said in an e-mail on Sept. 29.

Surging Investment

Chinese direct investment in Africa surged 81 percent in the first half to $552 million from a year earlier, according to an Aug. 18 report by China’s Ministry of Commerce.

In Nigeria, Africa’s biggest oil producer, China’s strategy has evolved and oil-for-infrastructure deals are “dead,” Gregory Mthembu-Salter wrote in a September research paper for the South African Institute of International Affairs.

“The model has been replaced by one in which Chinese energy companies gain access to the country’s oil resources by buying stakes in established companies.”

To contact the reporters on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net; John Duce in Hong Kong at Jduce1@bloomberg.net

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Copper Rises in London on Weaker Dollar, Improvement in Japan

By Anna Stablum

Oct. 19 (Bloomberg) -- Copper rose in London as the dollar weakened and the Bank of Japan said the country’s economy, the world’s second-biggest, is rebounding.

The Dollar Index, a six-currency measure of the greenback’s value, fell as much as 0.3 percent after dropping 1.1 percent last week. Speculation about further declines supported prices, Jim Lennon, an analyst at Macquarie Bank Group Ltd. in London, said in a report today. Japan’s economy is improving in all of the nation’s nine areas, the central bank said.

“The commoditization of the dollar is likely to be a theme that continues to be played out over the coming year,” Lennon said. Declines by the currency make dollar-priced metals cheaper for holders of other monies.

Copper for three-month delivery rose $50, or 0.8 percent, to $6,280 a metric ton on the London Metal Exchange at 9:42 a.m. local time. December-delivery copper gained 0.5 percent to $2.86 a pound on the New York Mercantile Exchange’s Comex unit.

The weaker dollar has helped copper to double this year, along with record first-half imports into China, the world’s biggest copper user. Japan ranks fourth. Chinese imports fell in monthly terms in July and August before rising 23 percent in September to 399,052 tons, according to figures on Oct. 14.

“We continue to expect that the market will move back into balance over the next three to six months as ex-China demand recovers and Chinese growth remains very strong,” Lennon said. “We believe any pullback in the copper price will be short- lived and will represent an opportunity to accumulate.”

Inventories of copper in LME-monitored warehouses fell 1,125 tons to 356,725 tons, the first decline in six days.

Among other LME metals for three-month delivery, aluminum was little changed at $1,904.25 a ton and zinc was unchanged at $2,053 a ton. Tin slipped 0.3 percent to $14,500 a ton, nickel rose 0.3 percent to $18,750 a ton, and lead advanced 0.8 percent to $2,220 a ton.

To contact the reporter on this story: Anna Stablum in London at astablum@bloomberg.net

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Gold May Gain in London as a Weakening Dollar Increases Demand

By Nicholas Larkin and Kim Kyoungwha

Oct. 19 (Bloomberg) -- Gold, little changed in London today, may gain on speculation a weaker dollar will boost the metal’s appeal as an alternative investment.

The Dollar Index, a six-currency gauge of the greenback’s strength, fell as much as 0.2 percent today. Bullion has climbed 20 percent this year as investors sought to protect their wealth from the declining dollar and as a hedge against inflation. Gold prices, heading for a ninth annual gain, reached a record $1,070.80 an ounce on Oct. 14.

“It is still too premature to short gold,” Andrey Kryuchenkov, a VTB Capital analyst in London, said today in a report. “The dollar remains vulnerable and investor appetite for gold could re-emerge very quickly.”

Immediate-delivery bullion added $2.68, or 0.3 percent, to $1,056.28 an ounce at 9:31 a.m. local time. The metal added 0.4 percent last week, the eighth gain in nine weeks. December gold futures were 0.5 percent higher at $1,057.10 an ounce on the New York Mercantile Exchange’s Comex division.

Still, nine of 16 traders, investors and analysts surveyed by Bloomberg, or 56 percent, said bullion would fall this week. Five forecast higher prices and two were neutral.

“The whole market is expecting to see some consolidation first before another round of buying,” said Kate Harada, a senior trader with Mitsubishi Corp. Futures & Securities Ltd. in Tokyo.

ETF Gold Sale

Gold holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged for a seventh day at 1,109.31 metric tons on Oct. 16, according to the company’s Web site. Assets in ETF Securities Ltd.’s exchange-traded products fell 5.1 percent to 8.068 million ounces on Oct. 16, its Web site showed.

An investor who recently bought shares in one of the company’s gold products made a “one-off” transaction, Nicholas Brooks, head of research and investment at ETF Securities, said today by phone. He declined to name the investor.

Among other precious metals for immediate delivery in London, silver added 0.1 percent to $17.49 an ounce. Platinum rose 0.4 percent to $1,349 an ounce, while palladium lost 0.4 percent to $327.75 an ounce.

To contact the reporter on this story: Nicholas Larkin at nlarkin1@bloomberg.net; Kyoungwha Kim in Singapore at Kkim19@bloomberg.net

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Japan’s Topix Rises on Speculation of JAL Bailout; Casio Drops

By Patrick Rial and Kotaro Tsunetomi

Oct. 19 (Bloomberg) -- Japan’s Topix index advanced, led by Japan Airlines Corp. on speculation the company will receive public funds. Banks rallied on confidence they won’t have to shoulder the bill for a turnaround plan.

Japan Airlines climbed 12 percent after the Yomiuri newspaper said Asia’s largest carrier may receive public funds. Mizuho Financial Group Inc., Japan’s second-biggest listed bank, added 2.3 percent. Casio Computer Co. and Yaskawa Electric Corp. slumped on loss reports. Fast Retailing Co., the operator of Japan’s Uniqlo casual-clothing chain, dropped 3.7 percent after a brokerage cut its investment rating on the shares.

The Topix gained 0.5 percent to 905.80 at the close of trading in Tokyo, reversing a decline of 0.8 percent. About twice as many stocks rose as fell. The Nikkei 225 Stock Average dropped 0.2 percent to 10,236.51.

“It’s becoming clear that the banks will not be victimized by the new government, wiping away some of the pessimism among investors,” said Fujio Ando, a fund manager at Tokyo-based Chibagin Asset Management Co.

Today marks the 22nd anniversary of “Black Monday,” when a drop in Hong Kong’s benchmark stock index and a 23 percent plunge in the Dow Jones Industrial Average in the U.S. sent markets reeling around the world. The Nikkei 225 and Topix slumped 15 percent the next day.

Mitsui Fudosan Co. led gains among property developers after Sumitomo Trust & Banking Co. and French insurer Axa SA said they plan to start a Japanese real-estate fund. Developers also rose after Nippon Accommodations Fund Inc. said it will sell shares to purchase additional properties.

Japan Airlines Rallies

Japan Airlines surged 12 percent to 113 yen, the sharpest gain in a year and the steepest advance in the Nikkei 225. The carrier may receive public funds to bolster capital, the Yomiuri newspaper reported.

The report came after the Nikkei newspaper said Japan’s three largest publicly traded banks, Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc., and Mizuho, decided to reject a government plan to help rehabilitate the airline. The three banks rose at least two percent today.

Casio sank 9 percent to 692 yen, its biggest decline since March 19 and the sharpest drop in the Nikkei 225. The company reversed its forecast for a 5 billion-yen ($55 million) annual profit to a 7 billion-yen loss as sales of mobile phones and digital cameras slump.

Yaskawa dropped 1.7 percent to 741 yen. The company reported a first-half operating loss of 8.4 billion yen and a net loss of 6.3 billion yen on Oct. 16, wider shortfalls than were expected by analysts.

Fast Retailing Rating

Fast Retailing, the operator of Japan’s Uniqlo casual- clothing chain, slumped 3.7 percent to 14,750 yen. The shares were lowered to “underweight” from “neutral” at JPMorgan Chase & Co., which said a recent rally took into account all positive news on the company. The stock climbed 44 percent in the month through Oct. 16.

“The markets are expecting the current growth trend to continue into next year,” said Yuichi Chiguchi, who helps manage about $8.6 billion at Diam Co. in Tokyo. “Investors may feel content until the end of this year, but may then realize the best period is already behind us.”

The Topix index has slumped 7.2 percent from its 2009 high reached on Aug. 26, as other Asian economies rebounded faster from the global recession. Stocks in the gauge are valued at 39 times estimated earnings, compared with an average of 28 times during the last four years.

Mitsui Fudosan climbed 4.6 percent to 1,643 yen. Nomura Real Estate Holdings Inc. added 4.3 percent to 1,582 yen.

Sumitomo Trust, Japan’s fifth-largest listed bank, and France’s Axa plan to raise 100 billion yen using debt and equity to invest in office property in “prime areas” of Tokyo amid signs the real-estate market is recovering. Sumitomo Trust shares climbed 1.2 percent to 498 yen.

Nippon Accomodations Fund jumped 7 percent 490,000 yen. The real-estate investment trust said Oct. 16 it will raise as much as 21.4 billion yen in a sale of new shares to buy more properties.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Kotaro Tsunetomi in Tokyo at ktsunetomi@bloomberg.net.

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European, Asian Stocks Climb; Shell, National Express Advance

By Adam Haigh

Oct. 19 (Bloomberg) -- Stocks in Europe and Asia climbed and U.S. futures rose as Nomura Holdings Inc. forecast earnings will support further gains in equities and National Express Group Plc got a 1.7 billion-pound ($2.8 billion) merger bid.

Royal Dutch Shell Plc and Cnooc Ltd. surged more than 1.9 percent as crude traded above $78 a barrel in New York. National Express jumped 9.1 percent after saying it received a “highly preliminary” merger proposal from Stagecoach Group Plc. Nestle SA increased 4 percent after UBS AG recommended the world’s largest food company.

Europe’s Dow Jones Stoxx 600 Index added 0.9 percent to 247.74 at 10:55 a.m. in London. The gauge has rallied 57 percent since March 9 as Royal Philips Electronics NV reported an unexpected third-quarter profit and results from Intel Corp., JPMorgan Chase & Co. and Google Inc. beat analysts’ estimates. The surge has pushed valuations on the index to 49.3 times reported earnings, near the most expensive level since July 2003, Bloomberg data show.

“I’m very much a bull,” said Chris McGale, head of European equities at Pali International Ltd. in London. “Equity markets will continue to push higher,” he said in a Bloomberg Television interview.

The MSCI Asia Pacific Index and futures on the Standard & Poor’s 500 Index added 0.6 percent.

U.S. Earnings

U.S. earnings in the third quarter will probably beat analysts’ projections, resulting in upgrades that should support a further rally through the end of the year, Nomura strategists including Shanthi Nair wrote in a report. The brokerage increased its forecast for 2010 operating-profit growth, saying earnings will advance 30 percent from the year before.

Of the 37 companies in the S&P 500 to have reported pre- share profits since Oct. 7, 84 percent have topped estimates, according to data compiled by Bloomberg.

The U.K. economy will grow twice as fast as previously expected next year as the country pulls out of the worst recession in a generation, according to Ernst & Young LLP’s Item Club, which uses the same model as the U.K. Treasury. Gross domestic product will increase 1 percent in 2010, compared with a 0.5 percent forecast in July, the researchers said.

Shell, Europe’s largest oil producer, gained 1.9 percent to 1,894 pence. Cnooc, China’s state-owned producer, climbed 4.2 percent to HK$12.42. Crude was little changed near a one-year high in New York.

National Express, Stagecoach

National Express soared 9.1 percent at 395 pence after saying it received a “highly preliminary” proposal from Stagecoach for an all-share transaction in which National Express shareholders would hold no more than 40 percent of the enlarged group.

National Express will “carefully consider” the proposal while continuing to progress with its plans for an equity fund raising, it said yesterday. Stagecoach said in a separate statement that at the invitation of National Express it submitted a letter to the board indicating the terms under which it would hold talks on a “possible combination.” Stagecoach slipped 2.1 percent to 153.6 pence.

Nestle gained 4 percent to 45.12 Swiss francs, the biggest jump in five months, as UBS raised its recommendation on the shares to “buy” from “neutral.”

Today is the 22nd anniversary of “Black Monday,” when an increase in U.S. interest rates and slowing economic growth sparked a slump that sent the Dow Jones Industrial Average down 23 percent and the S&P 500 20 percent lower in one day.

William Hill, Technip

William Hill Plc soared 8.6 percent to 174.9 pence, posting the steepest gain among all shares on the Stoxx 600. Third- quarter net revenue at the U.K.’s second-biggest bookmaker declined less than that of competitor Ladbrokes Plc.

Technip SA added 3.3 percent to 49.34 euros, gaining for a second day. Europe’s second-largest oilfield-services provider forecasts an increase in the level of new projects awarded in 2010, Chief Executive Officer Thierry Pilenko told Les Echos in an interview. The recovery could be “quite strong” at the end of 2010 and the start of 2011, the newspaper cited Pilenko as saying.

Separately, Technip is joining with Saudi partners to win contracts from oil company Saudi Aramco, according to senior vice president for the Middle East, Arturo Grimaldi. Technip is also seeking contracts in Iraq and plans to open an office in the country, Grimaldi said today at a conference in Abu Dhabi.

Acergy SA gained 4.8 percent to 76.35 kroner, the third- steepest increase on the Stoxx 600, after it was awarded a contract valued at approximately $500 million from Chevron Nigeria Ltd. for their gas development program in Escravos, offshore Nigeria.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

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Asian Stocks Rise on Crude-Oil Prices, China Growth Speculation

By Masaki Kondo

Oct. 19 (Bloomberg) -- Asian stocks advanced, led by energy and technology companies, as oil prices rose to a one-year high amid speculation data this week will show China’s economic growth gathered pace in the third quarter.

Cnooc Ltd., China’s largest offshore oil producer, added 4.2 percent in Hong Kong. Gemdale Corp., China’s fourth-largest developer by value, jumped 8.3 percent after a media report said apartment sales in the city of Shenzhen climbed. Taiwan’s Asustek Computer Inc. rose 4.9 percent after the Commercial Times said the company will report a third-quarter profit, compared with a loss the previous three months.

The MSCI Asia Pacific Index added 0.6 percent to 120.31 as of 6:01 p.m. in Tokyo. The gauge has surged 70 percent from a five-year low on March 9 amid signs the global economy is rebounding from the worst slowdown since World War II.

“The pace of the economic recovery will continue,” said Gabriel Gondard, Shanghai-based deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion. “Investors will look to the upcoming data for clues.”

China’s Shanghai Composite Index rose 2.1 percent, while Hong Kong’s Hang Seng Index added 1.2 percent. The Topix Index gained 0.5 percent in Tokyo, led by Japan Airlines Corp. on speculation the company will receive public funds.

Among stocks that fell, Casio Computer Co., which makes cameras and mobile phones, slumped 9 percent after forecasting a loss. Fast Retailing Co., Japan’s largest casual-clothing chain, sank 3.7 percent on a downgrade at JPMorgan Chase & Co. Korea Exchange Bank declined 5 percent amid valuation concerns.

U.S. Economy

Australia’s S&P/ASX 200 Index dropped 0.9 percent as a research firm said the nation’s economic recovery will be slower than expected. Australia & New Zealand Banking Group Ltd. lost 3.4 percent.

Futures on the Standard & Poor’s 500 Index rose 0.6 percent. The gauge sank 0.8 percent on Oct. 16 as General Electric Co.’s third-quarter revenue trailed analyst estimates. Bank of America Corp. led financial shares lower after posting a $1 billion loss.

“The General Electric result disappointed the market,” said Tim Schroeders, who helps manage $1.2 billion at Pengana Capital Ltd. in Melbourne. “Investors watch it closely as a bellwether for the U.S. economy.”

Today is the 22nd anniversary of “Black Monday,” when an increase in U.S. interest rates and concerns about slowing economic growth helped spark a sell-off that dragged the S&P 500 20 percent lower and the Dow Jones Industrial Average down by 23 percent in a single day.

China Growth

Cnooc advanced 4.2 percent to HK$12.42 after crude-oil futures in New York increased 0.3 percent to $78.75 a barrel in after-hours trading, the highest since Oct. 13, 2008. PetroChina Co., China’s largest producer, gained 3 percent to HK$10.28.

China is the world’s second-largest consumer of oil. Data due Oct. 22 will probably show the country’s economy expanded 9 percent in the third quarter, the fastest pace since September 2008, according to economists’ estimates.

Gemdale surged 8.3 percent to 16.19 yuan, while market leader China Vanke Co. jumped 6.8 percent to 12.34 yuan. The China Securities Journal reported property sales in Shenzhen reached 475 units on Oct. 11, a record for this year.

Asustek, the maker of the Eee PC low-cost notebook computer, climbed 4.9 percent to NT$58 after the Commercial Times reported it will post third-quarter net income of more than NT$4 billion ($124 million), citing analysts’ estimates. The company reported a loss in the previous quarter.

Japan Airlines soared 12 percent to 113 yen and posted the biggest advance on the MSCI World Index. The carrier may receive public funds to bolster capital, the Yomiuri newspaper reported.

Reform Concern

Gains in Japan were limited after Japan’s Financial Services Minister Shizuka Kamei said he told Japan Post President Yoshifumi Nishikawa that the government had decided to scrap plans for the company’s initial public offering. The privatization of Japan Post was a cornerstone of former Prime Minister Junichiro Koizumi’s reform program.

“International investors aren’t going to like indications that the reform movement in Japan if faltering,” said Naoteru Teraoka, who helps oversee about $16 billion at Chuo Mitsui Asset Management Co.

Casio tumbled 9 percent to 692 yen, the steepest drop since March 19. The maker of G-Shock watches cited declining sales of mobile phones and digital cameras for its full-year loss forecast.

The MSCI Asia Pacific Index rose to the highest level in more than a year last week as reports showed China’s export decline slowed and Australian consumer confidence rose. The seven-month rally has driven the average price of stocks in the gauge to 1.59 times book value, compared with a one-year average of 1.31 times.

Pace of Recovery

“Investors have been extremely fast to price an earnings recovery into stocks,” said Angus Gluskie, who manages about $300 million at White Funds Management Pty in Sydney. “It’s possible some may now find themselves disappointed at the pace of the fundamental recovery.”

Fast Retailing lost 3.7 percent to 14,750 yen and traded at 5.79 times corporate net worth after JPMorgan cut its rating to “underweight” from “neutral.”

“Most of the good news is probably now discounted” in the stock price after gains in the past month, Chiaki Hirota, a JPMorgan analyst, wrote in a report on Oct. 16.

Korea Exchange Bank, controlled by U.S. buyout firm Lone Star Funds, slumped 5 percent to 14,350 won after ending last week at the highest level since June 2008. The stock’s 14-day relative strength index closed at 78 on Oct. 16, above the threshold of 70 that some investors use as a signal to sell.

Biggest Drags

Australia & New Zealand Banking, Australia’s No. 4 bank, slid 3.4 percent to AS$23.73, while Westpac Banking Corp. dropped 2.5 percent to A$26.30. The two companies were the biggest drags on the MSCI Asia Pacific Index.

While the nation’s economy “sailed through the worst of the global crisis on a sea of stimulus,” the recovery will be “softer and slower” than some expect, Chris Richardson, head of Canberra-based Access Economics, wrote in a report.

Reserve Bank of Australia Governor Glenn Stevens, who this month became the first Group of 20 policy maker to raise borrowing costs, signaled on Oct. 15 he will increase rates again as soon as next month.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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U.K. Stocks Gain as Mining Shares Rise; National Express Jumps

By Sarah Jones

Oct. 19 (Bloomberg) -- U.K. stocks advanced, as higher commodity prices boosted the earnings prospects for mining companies and National Express Plc received a 1.7 billion-pound ($2.8 billion) takeover offer.

Anglo American Plc and Vedanta Resources Plc rose at least 2.5 percent as copper rebounded in Asia. National Express jumped 9.6 percent after the British rail operator said it received a “highly preliminary” proposal from Stagecoach Group Plc. William Hill Plc surged 8.4 percent after reporting higher online sports betting sales.

The benchmark FTSE 100 rallied 56.93, or 1.1 percent, to 5,247.17 at 10.28 a.m. in London, advancing for the first time in three days. The FTSE All-Share Index gained 1 percent, while Ireland’s ISEQ Index slid 0.1 percent.

“Rising commodity prices are helping to lift the heavyweight miners and energy stocks,” said London-based Joshua Raymond, a market strategist at City Index. “Investors are using Friday’s losses as another buying opportunity.”

The FTSE 100 has rebound 49 percent since March 3 as companies report better-than-expected earnings and investors speculate the worst of the global recession has passed. Today marks the 22nd anniversary of “Black Monday,” when an increase in U.S. interest rates and slowing economic growth sparked a slump that sent the Dow Jones Industrial Average tumbling more than 20 percent in one day.

Ernst & Young LLP’s Item Club today said the U.K. economy will grow twice as fast as previously expected next year as the country pulls out of the worst recession in a generation.

Anglo American Climbs

Gross domestic product will increase 1 percent in 2010, compared with a 0.5 percent forecast in July, the researchers, who use the same model as the U.K. Treasury, said in a statement in London.

Anglo American climbed 2.8 percent to 2,262 pence as copper rebounded amid speculation a report in China will show economic growth in the world’s largest metals consumer accelerated in the third quarter. Vedanta Resources Plc added 2.5 percent to 2,370 pence, and Lonmin Plc increased 2.8 percent to 1,735 pence. Lead, nickel and zinc also climbed on the London Metal Exchange.

Hochschild Mining Plc rallied 2.3 percent to 320.3 pence. BofA Merrill Lynch Global Research raised its recommendation for Peru’s second-largest silver miner raised to “buy,” as the bank raised its long term gold and silver price estimates.

Royal Dutch Shell Plc, Europe’s largest oil company, increased 2 percent to 1,896 pence and BP Plc, the second- biggest, added 1.3 percent to 566.3 pence. Crude added as much as 0.7 percent to $79.05 in New York.

‘Highly Preliminary’

National Express climbed 9.6 percent to 396.6 pence. The company said it received a “highly preliminary” proposal from Stagecoach for an all-share transaction in which National Express shareholders would hold no more than 40 percent of the enlarged group.

The company will “carefully consider” the proposal while continuing to progress with its plans for an equity fund raising, it said yesterday.

National Express tumbled 23 percent on Oct. 16 after CVC Capital Partners Ltd. scrapped a 765 million-pound bid for National Express.

Stagecoach lost 1.9 percent to 154 pence, extending last week’s 6.5 percent decline.

William Hill climbed 8.4 percent to 174.6 pence. The U.K.’s second- biggest bookmaker rose the most since January as its third-quarter performance bettered that of competitor Ladbrokes Plc.

Fiscal third-quarter net revenue dropped 3 percent, which compares with a 15 percent decline at Ladbrokes. Both companies were hurt as fewer soccer games were tied than in previous seasons, a development that favored betters. Online sports betting sales rose 40 percent in its fiscal third quarter.

-- Editors: Roger Neill.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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CEOs Showing Remorse Underestimating Shares Stifle Convertibles

By Lynn Thomasson and Mary Childs

Oct. 19 (Bloomberg) -- The steepest equity market rally since the Great Depression is turning 2009 into the worst year in a decade for convertible bond sales as executives conclude the cost of the securities is too high.

Companies from Johnson Controls Inc. to Teradyne Inc. sold $23.5 billion in securities that can be swapped for common stock, the least since 1999, according to data compiled by Bloomberg. Sales evaporated after 51 percent of the corporations that issued the debt saw shares rise above exchange prices, the most in 11 years of data, diluting earnings for existing investors.

Outstanding convertible securities have returned a record 43 percent so far in 2009, Merrill Lynch & Co. data show, almost twice that of the Standard & Poor’s 500 Index including dividends. Chief executive officers are reluctant to tap the market until they’re convinced the rally that drove the S&P 500 up 61 percent since March is over, bankers and analysts at Jefferies Group Inc. and Bank of America Corp. say.

“If we were looking to raise capital today, we would consider convertible bonds, but more than likely we would go with traditional debt markets,” Frank Voltolina, the treasurer at Milwaukee-based Johnson Controls, wrote in an e-mail. “That was not the case nine months ago, when convertible bonds were the best economic alternative.”

Johnson Controls

The largest maker of car seats raised $402.5 million in March selling 6.5 percent notes that can be swapped for 36 million shares at $11.19 each. At the time the deal was announced, the conversion premium was 25 percent above its price. Since then, the shares more than tripled to $26.45 on Oct. 16 in New York.

Johnson had 594 million shares at the end of 2008, so changing the notes into equity would have diluted earnings by 6.1 percent. The company offered to exchange each of the securities for 89 common shares and $120 on Aug. 20, leaving $2.1 million of the issue outstanding.

Convertible bonds are debt securities with an option to exchange the notes for common shares at a premium to the market price. They pay lower interest than bonds that can’t be exchanged. They’re attractive when companies don’t expect a gain in their equities to trigger a swap, adding to outstanding stock and cutting the stake of existing shareowners.

Offerings of the securities more than tripled to $12.7 billion in the second quarter after the U.S. government and Federal Reserve lent, guaranteed or spent $11.6 trillion to end the worst credit crisis since the 1930s.

Markets Rally

As the S&P 500’s gains accelerated and sales of high-yield bonds began a 76 percent increase from 2008, convertible offerings declined, falling 48 percent in the third quarter. High-yield bonds are rated below BBB- by S&P and less than Baa3 by Moody’s Investors Service.

“It’s difficult to pull the trigger on a convertible when the high-yield market is open and you don’t like your stock price,” said Robert Aberman, co-head of convertible origination at Jefferies in New York. “If you believe the market is going to turn in general or your earnings will rebound and propel your stock price in the short term, then a convertible is going to be reasonably expensive.”

Wyndham Worldwide Corp., the franchiser of Days Inn hotels, offered 3.5 percent securities due in 2012 in May that can be swapped at $12.73, a 20 percent premium to the price of the stock that day. The shares surged 68 percent to $17.86, giving the bond a 49 percent return, data compiled by Bloomberg show.

Call Options

Wyndham’s securities are convertible into cash equivalent to 18.1 million shares. The company purchased call options boosting the conversion price of the notes to $20.16, Wyndham Chief Financial Officer Thomas Conforti said in an interview. That’s 13 percent above the stock’s closing price on Oct. 16.

“You make the best decision you can with the facts and circumstances as you have them at the time,” said Christopher Feeney, the treasurer for Parsippany, New Jersey-based Wyndham. “If we were to access the unsecured bond market today, it would cost less.”

Teradyne, a designer of test equipment for electronics based in North Reading, Massachusetts, offered $190 million in 4.5 percent notes in March that can be exchanged at $5.48 a share, a 25 percent premium on the day of the deal. The company’s convertible bonds have returned 84 percent as the stock surged 120 percent to $9.86.

Teradyne’s notes can be converted into about 34.7 million shares, about 20 percent of the 169.7 million the company had outstanding on Dec. 31, or cash. Teradyne paid $64.6 million for an option that helps offset the cost of issuing shares following an exchange.

Boston Red Sox

“You want to be in a position to be in control of your destiny instead of someone else, so that was the right thing to do at the time,” said Andy Blanchard, Teradyne’s vice president of corporate communications. “If you went out for money today, you’d certainly be able to do it with better terms and conditions. I wish the Red Sox bullpen was stronger, but there’s a lot of things you could hope for, right?”

Stock and credit markets may never have rallied without convertible sales, said Wyndham’s Feeney. Offerings took off in March, when $2.4 billion was sold. That’s the month the S&P 500 began its rally from a 12-year low and the gap between corporate bond yields and Treasury rates began to narrow from the widest gap ever, according to data compiled by Bloomberg.

Extra yield demanded by investors to own corporate bonds instead of Treasuries narrowed 4.59 percentage points this year to 3.45 percentage points on Oct. 9, according to Merrill Lynch’s Corporate & High Yield Master Index.

First Trade

“I don’t think you get the rally in the spread without us having the first trade,” Feeney said. “We made a good decision at the time. You take the facts as you have them at the time, you make the decision and you live with the results.”

Sales of non-convertible debt rose to more than $1 trillion this year as investment-grade yields fell to 4.86 percent on Oct. 10, the lowest in four years, according to Merrill Lynch data. Junk bonds yield 10.1 percent, below the historical average of 11.1 percent from the past 23 years.

As much as $65 billion in convertible offerings were forecast for 2009 at the start of the year, Tatyana Hube, an analyst at Charlotte, North Carolina-based Bank of America, wrote in a September research report. So far, the total is less than half that, according to data compiled by Bloomberg.

Smaller Supply

The shrinking market is adding to the rally, according to Hube. As bonds matured or were traded for equity, the pool of notes decreased this year by $27.8 billion as of Oct. 12, she wrote in a note to clients. That followed a $19.9 billion contraction in 2009.

Before the credit crisis, the worst quarter for convertible securities was the period ending in September 2002, when $2.88 billion were sold. The S&P 500 rallied 36 percent by the end of the following year, beginning a bull market in which the index doubled by October 2007.

“There’s such a big restoration due for equity prices that people are thinking, ‘Why give away any of that?’” said Tom Deas, treasurer of Philadelphia-based soda ash producer FMC Corp. and the executive vice president of the National Association of Corporate Treasurers. “People tend to do converts when the balance is such that you’re not giving away any upside.”

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Mary Childs in New York at mchilds4@bloomberg.net.

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U.S. Earnings Upgrades to Fuel Year-End Stock Rally, Nomura Says

By Stephen Kirkland

Oct. 19 (Bloomberg) -- U.S. earnings in the third quarter will probably beat consensus expectations, resulting in upgrades that should support a further rally to year-end, according to Nomura Holdings Inc.

“We are raising our expectations for U.S. earnings to 30 percent for 2010, year-on-year growth in operating earnings” for the Standard & Poor’s 500 Index, Nomura wrote in a report dated Oct. 16. “This would equate to $75 for operating earnings for the S&P.”

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U.S. Stock-Index Futures Rise; Texas Instruments, Alcoa Climb

By Daniela Silberstein

Oct. 19 (Bloomberg) -- U.S. stock-index futures advanced, indicating the Standard & Poor’s 500 Index will extend its second straight weekly gain, on speculation corporate earnings will continue to beat expectations and as commodity prices rose.

Texas Instruments Inc. and Apple Inc. climbed in Germany before reporting results. Alcoa Inc., the largest U.S. aluminum producer, and Barrick Gold Corp. gained with higher metals prices. Exxon Mobil Corp. advanced as crude oil increased.

Futures on the S&P 500 expiring in December added 0.5 percent to 1,087.5 as of 9:43 a.m. in London. Dow Jones Industrial Average futures rose 0.4 percent to 9,962. Nasdaq-100 Index futures increased 0.6 percent to 1,741.25. European and Asian shares also advanced.

U.S. stocks climbed last week after profits from JPMorgan Chase & Co. to Intel Corp. and Google Inc. surpassed analysts’ estimates, lifting the Dow above 10,000 for the first time in more than a year.

“Earnings so far have shown a positive trend,” said Manfred Hofer, head of equity analysis at LGT Capital Management in Pfaeffikon, Switzerland, which oversees about $73 billion. “Companies still have good cost management as we already saw last quarter but now sales are also showing a positive development. The combination of both should be positive for the market.”

Nine Quarters

Companies in the S&P 500, which has rebounded 61 percent from a 12-year low in March, will report a ninth straight quarter of declining profits, the longest streak since the Great Depression, before returning to growth in the final three months of the year, analysts’ estimates compiled by Bloomberg show.

U.S. earnings in the third quarter will probably beat analysts’ estimates, resulting in upgrades that should support a further rally to year-end, according to Nomura Holdings Inc.

“We expect third quarter results to beat consensus expectations and result in upgrades for the fourth quarter and over the next year of about 8 percent and 3 percent, respectively,” Nomura wrote in a report dated Oct. 16.

Thirty-one of the 37 companies in the S&P 500 that have reported earnings since Oct. 7 surpassed analysts’ projections, according to Bloomberg data.

Texas Instruments rose 1 percent to $22.97. The second- largest U.S. chipmaker is scheduled to report third-quarter earnings. Apple, the maker of Macintosh computers, the iPhone and the iPod media player, gained 0.6 percent to $189.17.

BB&T, Alcoa

BB&T Corp., the seventh-largest U.S. bank by deposits, is also among companies scheduled to publish results today.

Alcoa jumped 1.1 percent to $14.19. Copper climbed on speculation a report in China will show economic growth in the world’s largest metals consumer accelerated in the third quarter driven by the government’s $586 billion stimulus package. Aluminum, nickel, zinc and lead also rose.

Barrick Gold added 0.7 percent to $38.94 as the precious metal rose in London.

Exxon, the biggest U.S. oil company, added 0.5 percent to $73.52 as crude rose above $78 a barrel in New York. Chevron Corp., the second-largest U.S. oil company, increased 1.2 percent to $77.72.

A report at 1 p.m. may show builder confidence continued to climb this month. The National Association of Home Builders/Wells Fargo index probably rose to 20 from 19, economists surveyed said. It would be the seventh straight increase. While higher, readings less than 50 still signal that most respondents view conditions as poor.

Today is the 22nd anniversary of “Black Monday,” when an increase in U.S. interest rates and slowing economic growth sparked a panic that sent the Dow down 23 percent and the S&P 500 20 percent lower in one day.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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