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Treasuries Drop Prior to Fed Minutes Signaling Economy Optimism

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Prior to the Federal Reserve issuing the minutes of its most recent policy meeting amid speculation that policy makers could be more optimistic on the country’s economy, Treasuries dropped.

Securities further extended losses after a report revealed building permits within the United States climbed last October, this as housing begins to fall. Also climbing were extra yield US corporate bonds offer over Treasuries, reaching the highest level in 2014 as companies like Johnson & Johnson borrow and Alibaba Group Holding Ltd. Gets reading for an $8 billion sale.

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Birgit Figge, fixed-income strategist at Frankfurt-based DZ Bank AG said the minutes might be positive regarding view of the economy. However, the Treasuries market could experience a negative surprise.

Rising four basis points or 0.04% point was the benchmark US 10-year yield, hitting 2.35% in morning trading, this according to data from Bloomberg Bond Trader. The 2.25% note coming due in November 2024 hit 99 3/32, dropping 10/32 or $3.13 per $1,000 face amount.

Corporate bonds have been sought by investors as another option to Treasuries, this after US central bank debt purchases pushed yields of government and mortgage-backed securities down.

In addition, the Fed’s meeting minutes from October in which policy makers ended purchases, will be coming due today. Officials from Central Bank, to include William C. Dudley, New York Fed President, said that US interest rates are expected to increase sometime next year.

Regarding single-family homes, condominiums, and apartments dropped to 1.01 million or 2.8% annualized rate after September’s 1.04 million pace. This pace was much stronger than reported earlier as revealed in a report from the Commerce Department. Rising to the highest level since June of 2008 was permits for future projects.

According to the Bloomberg US Corporate Bond Index, securities of investment grade debt yielded 133 bases points over yesterday’s benchmark government debt, making it the widest spread dating back to December 2013.

The additional yield offered by corporate bonds over Treasuries narrowed in June to 1.02% point. On average, this yield has been at 1.57% points based on data beginning in 2010.

Yesterday, both Citigroup and Johnson & Johnson sold $2 billion of debt and as far as the planned sale by Alibaba, it would be the biggest ever dollar denominated bond offering for a borrower based in Asia.

Hajime Nagata, money manager at Tokyo’s based Diam Co said that there are numerous issues in the future that will drive corporate spreads even wider. Diam Co, which oversees the equivalent of $120.2 billion, added that as far as Treasuries, expectations for inflation will be quieted and yields will remain low.

In a statement from Yoshiyuki Suzuki, head of fixed income at Fukoku Mutual Life Insurance Co in Tokyo and responsible for overseeing $53 billion in assets, the spread for corporate bonds is too narrow. This year, not a single US company bond has been purchased by Suzuki.

Drawing demand are government securities, this as inflation remains in check and during a time of slowing for economic growth throughout the world.

There was a difference of 1.86% points for yields on 10-year Treasuries and similar maturity Treasury Inflation Protected Securities, which is used to gauge trader expectation for consumer prices over a debt’s lifetime. A close at this level would make it the lowest in three years.

As stated to reporters last week, Mark Carney, governor with the Bank of England said that Europe is facing the threat of economic stagnation. Also in a recession is Japan.

In November, corporate bonds fell 0.5% opposed to a 0.2% gain for Treasuries as indicated by Bloomberg indexes. For this year, there was a gain of 6.5% for company debt while an advance of 5.1% was experienced by government securities.

With wintertime approaching in the United States, demand for safety after storms helped drive an economic reduction in the first quarter is being fueled, this according to Seoul-based Meritz Securities Co.

Park Sungjin who invests $7 billion being the head of asset management at Meritz believes that corporate bond spreads will continue to widen with winter on the way.

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David Goldstein

David is cool! :)

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