PrefBlog

Here’s a switch! Treasuries were under pressure today … Russia’s concerned about credit quality:

Thirty-year bond yields reached the most in a year after a Russian central bank official said the nation may buy International Monetary Fund bonds.
…
Russia’s central bank may switch some of its reserves from Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy.

Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.

Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.

The dollar fell as Russia’s announcement added to speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, decreased 0.2 percent to 79.649, after sliding 1.3 percent yesterday.

“The market is reacting to this Russia thing,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The dollar has restarted its dive to lower levels.”

Perhaps not surprisingly, the Treasury 10-year auction was horrible:

Treasuries declined, pushing 10-year yields to the highest level since October, as the government sold $19 billion of the securities and Russia said it may switch some reserves from U.S. debt.

The notes drew a yield of 3.99 percent, the highest since August 2008. The auction was the second of three sales this week that will raise $65 billion, part of the government’s record borrowing program. A Russian central bank official said the nation may buy International Monetary Fund bonds.

“There are an awful lot of Treasuries being auctioned and there’s going to be more and more and more and more,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The yield on the 10-year note rose seven basis points, or 0.07 percentage point, to 3.92 percent at 2:44 p.m. in New York, according to BGCantor Market Data. It earlier reached 3.99 percent, the highest since Oct. 16. The 3.125 percent security maturing in May 2019 declined 1/2, or $5.00 per $1,000 face amount, to 93 1/2.

The 30-year bond yield touched 4.83 percent, the highest in a year. The government is scheduled to sell $11 billion of the securities tomorrow.

Lots of volume but not much price action for preferreds today, although Floaters got hit – largely due to TRI.PR.B, which had low volume and a high closing spread, so it’s not clear how seriously the decline should be taken. PerpetualDiscounts closed with a yield of 6.35%, equivalent to 8.89% interest at the standard equivalency factor of 1.4x; long corporates are now yielding about 6.6%, having returned +3.43% on the month-to-date, so the pre-tax interest-equivalent spread is now about 229bp … up from the 213bp calculated on June 4 due almost entirely to a decline in long corporate bonds that has – over the week – been unmatched by preferred shares … the yield on PerpetualDiscounts is actually fractionally higher that it was at the last calculation.

This entry was posted on Wednesday, June 10th, 2009 at 7:10 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.