Tuesday, January 27, 2009

Coming Glut Pushes Down Treasurys VS GE outlook

By DEBORAH LYNN BLUMBERG and MICHAEL S. DERBY Worries about coming government-debt issuance continued to weigh on the Treasury market, sending prices lower again. Longer-term securities led Monday's losses, but the declines occurred across the yield curve. The benchmark 10-year note was down 8/32, or $2.50 for every $1,000 invested, to yield 2.643%. The yield was up from 2.618% on Friday as bond yields rise when prices fall. The losses came as the government sold 20-year Treasury Inflation-Protected Securities, or TIPS, which took an unusual turn: Against the 2.374% yield on the when-issued version ahead of the bidding deadline, the security sold at a cheap yield of 2.50%. That is even as indirect bidders -- foreign and domestic institutional investors, including foreign central banks -- bought some 54% of the $8 billion offered, in line with the recent average. Barclays Treasury and TIPS strategist Michael Pond said some investors had bought TIPS ahead of the auction as they expected to see more demand after a strong auction of 10-year TIPS in early January. Uncertainty over the Treasury's intentions -- last week, a quarterly questionnaire sent to dealers raised the possibility of a return of the 30-year TIPS as early as April -- led to less demand at the auction itself, he said. Concerns about large amounts of funds governments will have to raise to finance their stimulus plans has kept bond markets, including the Treasury market, under pressure in recent sessions. The U.S. is selling a total of $135 billion in debt this week; besides the TIPS auction, the Treasury sold $57 billion of Treasury bills on Monday. The Treasury will sell $40 billion of two-year notes and $30 billion of five-year notes later this week. Treasury prices fell every trading day last week as investors anticipated the robust supply, as well as issuance longer term. "Bond markets remain in a somewhat sour mood," said strategists at RBC Capital Markets in New York. Also, the February refunding is just around the corner. The government will auction three-, 10- and 30-year Treasurys the second week of the month. The auction sizes will be announced next week. Strategists at RBS Greenwich Capital expect the Treasury to sell a total of $66 billion, with $30 billion in three-year notes, $22 billion in 10-year notes and $14 billion in 30-year Treasurys. Midweek, investors will hear from the Federal Open Market Committee, which is expected to leave rates unchanged at their ultra-low zero to 0.25% level. Some investors, though, are looking for the Fed to shed more light on its intentions when it comes to the possible buying of longer-term Treasurys. Policy makers have alluded to buying longer-term government debt as another way of helping the economy. GE's Negative Outlook Is Retained by S&P Standard & Poor's Ratings Services said General Electric Co.'s fourth-quarter results won't change its ratings view on the conglomerate but noted that GE Capital likely will suffer more than it thought last month. At that time, S&P took the first step toward potentially lowering its AAA credit ratings on GE because of funding concerns at GE Capital. That negative rating outlook remains, S&P said on Monday. It noted the business would have had a "significant net loss" were it not for a "substantial" tax credit that made up more than half of GE's profit for the quarter. S&P also highlighted GE Capital's credit losses, which the company now sees at $10 billion for 2009, up $1 billion from December. But despite the woes, S&P said GE Capital "will continue to outperform the majority of its major financial institution peers," as it is on track to improve liquidity and cut funding risks and leverage. There have been concerns about GE's ability to maintain its top-tier credit rating while also not cutting its dividend. Executives said Friday that both can be done simultaneously. GE's industrial operations continue to report strong results, with cash balances and cash flow for 2008 coming at the higher end of S&P's expectations. Those levels are expected to remain "robust" this year, said the ratings firm, but be "somewhat" below 2008. —Kevin Kingsbury Write to Deborah Lynn Blumberg at deborah.blumberg@dowjones.com and Michael S. Derby at michael.derby@dowjones.com

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