Treasuries climb as official says Obama to seek spending freeze

By Susanne Walker
(c) 2011 Bloomberg News
Tuesday, March 15, 2011; 1:07 PM

Yields on 10-year notes fell the most in almost three months as the Bank of Japan's efforts to provide liquidity and expand an asset-purchase program failed to stem an equity selloff, which sent the Nikkei 225 Stock Average down as much as 14 percent and sapped U.S. stocks. Two-year note yields slumped as Federal Reserve policy met.

"It's a panic trade," said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. "The main concern was a nuclear disaster. A lot of uncertainty puts a bid in Treasuries and takes it out of risk assets."

Yields on 10-year notes decreased seven basis points, or 0.07 percentage point, to 3.29 percent at 12:50 p.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent note due in February 2021 rose 5/8, or $6.25 per $1,000 face amount, to 102 27/32.

Benchmark 10-year yields touched 3.20 percent, the lowest level since Dec. 10, falling as much as 15 basis points in the biggest intraday drop since Dec. 29. Two-year note yields slid as much as nine basis points to 0.50 percent, the lowest level since Dec. 7. Yields on 30-year bonds decreased as much as 12 basis points to 4.41 percent, the lowest since Jan. 5.

Treasury Secretary Timothy F. Geithner said he doesn't think Japan will have to sell Treasuries to raise cash as the government in Tokyo battles to cool three earthquake-damaged nuclear reactors.

Japan has "a very high savings rate," Geithner told the Senate Banking Committee today. "It has the capacity to help deal with not just the humanitarian challenge but the reconstruction challenge they face ahead."

The Fed will delay any upgrading of its economic outlook today as its policy committee weighs the economic impact of the earthquake in Japan and rising oil prices, according to former Richmond Fed President Alfred Broaddus.

"With all that has happened -- the tragedy in Japan, the recent run-up in energy prices -- all of that takes the likelihood of any significant change at all, even any small change, pretty much off the table," Broaddus said in a Bloomberg Radio interview on "Bloomberg Surveillance" with Tom Keene. "What they are going to want to signal is continuity and steadiness for now."

Policy makers were almost certain to fulfill their plan to buy $600 billion in Treasuries, a survey of economists showed. How they finish the purchases and what they do next is a matter of disagreement.

Of 50 economists surveyed by Bloomberg News last week, 49 said the Fed will buy the full amount of bonds in a bid to boost the economy. Thirty-one said the central bank won't adjust the pace or duration of the purchases, as it did in the first round of quantitative easing in 2009-10.

All 101 economists in a Bloomberg News survey expected the Fed today to hold its target rate for overnight lending at zero to 0.25 percent, where it has been since December 2008. The central bank's statement is due at 2:15 p.m. Washington time.

The difference between the upper end of the Fed's target and 10-year note yields fell to 3.04 percentage points, the narrowest in almost two months.

Japanese investors will repatriate funds as the nation seeks to recover from its strongest earthquake on record, according to Mohamed El-Erian, chief executive officer at Pacific Investment Management Co.

While inflation and the deficit will rise, Japan will be able to navigate the economic shock, El-Erian, who's also co- chief investment officer, said via telephone in a radio interview on "Bloomberg Surveillance" with Tom Keene.

Japan's holdings of Treasuries rose for an eighth straight month to $885.9 billion in January, the longest period of increases since a 22-month span ended in August 2004, the Treasury Department reported today.

Short-term Treasury bills accounted for $62.5 billion, or 7.1 percent of Japan holdings, according to Treasury Department figures. Japan is the second-largest foreign lender to the U.S. after China, whose holdings fell for a third straight month to $1.15 trillion.

Even as Japanese investors typically repatriate assets in March for the country's fiscal year-end, their holdings of Treasuries rose 2 percent in March 2010 and haven't decreased in March since 2007.

The Bank of Japan added 8 trillion yen ($98 billion) to the banking system today after BOJ Governor Masaaki Shirakawa pledged yesterday at a news conference in Tokyo to keep pumping cash as needed following the addition of a record 15 trillion yen to the economy.

The central bank doubled its asset-purchase program yesterday to 10 trillion yen, an increase that's about one-tenth the size of the Fed's program of buying Treasuries.

Japan's Prime Minister Kan called for calm as the government battled to cool three quake-damaged nuclear reactors with seawater and Tokyo shoppers stripped water, food and batteries from supermarket shelves.

Chief Cabinet Secretary Yukio Edano said radiation readings outside reactors rocked by explosions were falling below levels that are harmful, while a fire at a separate unit appeared to have been put out. Earlier, Edano had said the steel unit containing the radioactive core of one reactor had been damaged and warned of dangerous contamination.

The Nikkei 225 Stock Average had its biggest two-day decrease since 1987, while the Standard & Poor's 500 Index tumbled 1.8 percent and the MSCI World Index of developed nations fell 2.6 percent.

© 2011