Finance topics

Treasury notes gained for a seventh week, the longest streak in more than two years, as concern the debt crisis in Europe is worsening and signs of slowing growth in the world’s largest economy stoked demand for the relative safety of government debt.

Two-, five- and seven-year notes gained as investors bid the most in almost 17 years for five-year debt and since seven- year securities were reintroduced in 2009 at auctions this week, while benchmark 10-year notes appreciated for a second week. U.S. government data showed the economy grew more slowly than forecast in the first three months of the year. Employers added fewer jobs in May than in April, according to a Bloomberg News survey before the June 3 report.

“As long as Europe is in this tenuous position, you’re going to have some safe-haven flow into U.S. fixed-income,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that trade directly with the Federal Reserve. “It will take some time to remove the uncertainty.”

The yield on the 10-year note fell eight basis points or 0.08 percentage point to 3.07 percent from 3.15 on May 20. It touched 3.04 percent yesterday, the least since Dec. 7. The 3.125 percent security due in May 2021 rose 19/32, or $5.94 per $1,000 face amount, to 100 14/32.

Yield Drops

Two-year yields fell four basis points to 0.48 percent, five-year note yields dropped seven basis points to 1.72 percent and seven-year notes declined eight basis points to 2.40 percent. The streak of declines in seven-year yields is the longest since the security was reintroduced in 2009. The runs of declines in two-and five-year yields were last seen in November and December of 2008.

Treasuries have returned 1.44 percent in May, heading for the best month since August, according to Bank of America Merrill Lynch data. They rose 1.15 percent in April and have returned 2.47 percent so far this year.

At the May 26 seven-year note auction, the securities drew a yield of 2.429 percent, compared with the average forecast of 2.448 percent in a Bloomberg News survey of nine primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 3.24, the highest level since February 2009, the beginning of records on the data for this maturity.

Bid Patterns

The government’s $35 billion auction of five-year securities May 25 drew the highest bid-to-cover ratio since 1994, while demand at the sale of the same amount of two-year debt on May 24 was the strongest since January.

Yields on 10-year yield on German bunds fell a for seventh week, closing below 3 percent for the first time since January as investors sought safe assets amid concerns about the need to restructure Greek debt and as inflation slowed.

European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects. An index of executive and consumer sentiment in the 17-member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said yesterday.

“We’re going to have this lingering backdrop for a while,” said Michael Cloherty, head of U.S. interest rate strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, a primary dealer. “You don’t resolve Europe in a weekend. You’re looking for things they can do that buy them time. ”

Global Outlook

Group of Eight leaders said a strengthening global economy will pave the way to cuts in the debt built up during the recession that followed the 2008 financial crisis.

“The global recovery is gaining strength and is becoming more self-sustained,” according to a statement yesterday after a two-day summit in Deauville, France. President Barack Obama told leaders that the U.S. budget deficit limited the country’s ability to act as the engine of the global economy, the European diplomats said.

America’s gross domestic product grew at 1.8 percent annual rate in the first quarter, Commerce Department figures showed May 26. The gain was the same as estimated last month and compared with a 3.1 percent increase in the prior quarter. The median forecast of 82 economists in a Bloomberg News survey was for a revised 2.2 percent gain.

U.S. employers may have added 185,000 jobs in May, compared with 244,000 in April, according to the median forecast in a Bloomberg News survey of 68 economists. The nation’s unemployment rate is projected to fall to 8.9 percent from 9 percent.

“The economy remains tepid, growth is tepid, which in the mindset of the marketplace pushes the Federal Reserve on hold probably longer,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia.

The Fed’s target rate for overnight lending between banks will rise to 0.5 percent by the first quarter of 2012, according to median forecast of economists surveyed by Bloomberg News. The central bank has kept its target rate at zero to 0.25 percent since December 2008.

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Treasury Secretary Timothy Geithner said failing to raise the country’s debt limit may lead to “irrevocable damage” to the economy and risk a “double-dip recession.” Geithner commented in a letter dated yesterday to Senator Michael Bennet, Democrat of Colorado.

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Dining out will cost more this year as U.S. restaurants take advantage of the nearly two-year long expansion to boost prices on food and drinks.

Higher-priced menus reflect growing confidence by eateries that consumers can afford to pay more to eat out. Restaurants are emboldened in part by the success of U.S. airlines, which have raised fares almost 10 percent since a year ago, according to Dean Maki, chief U.S. economist at Barclays Capital in New York.

“The fact that the airline industry was able to pass along cost increases signals that the pricing environment has become somewhat more favorable than it was during the heart of the recession,” Maki said. “It’s more likely restaurants will be able to pass along price increases now relative to the last few years.”

Higher food and fuel costs are spurring menu changes, which are reflected in the food-services category of the personal- consumption-expenditures price index. Purchased meals and beverages, which make up about 6 percent of core PCE, rose nearly 2 percent in March from a year ago, the biggest increase since November 2009, according to data from the Bureau of Economic Analysis in Washington.

Several apparel companies — including San Francisco-based Levi Strauss & Co., which supplies jeans to retailers in more than 110 countries — also have announced increases to offset higher costs for cotton, foreign wages and freight. With imported-clothing prices rising at the fastest rate in at least a decade, retailers stand a better chance of exerting pricing power, Maki said.

Pressure on the Fed

All this puts pressure on the Federal Reserve to prevent inflation from getting out of hand, said Samer Nsouli, chief investment officer in New York for the Lyford Global Macro Fund.

“Inflation hawks see restaurants and airlines passing through higher prices and say the Fed’s behind the curve,” Nsouli said. “The Fed’s not paying enough attention to such trends when it comes to its continued accommodative monetary policy.”

The central bank’s Federal Open Market Committee said it “will pay close attention to the evolution of inflation” in the statement for its April 27 meeting, when it kept the target for the federal funds rate, or overnight inter-bank lending rate, at zero to 0.25 percent. It first set the rate at the record low in December 2008. The Fed also reaffirmed at the April meeting its plan to complete a $600 billion Treasury purchase program by June.

‘Transitory’ Threat

Fed Chairman Ben S. Bernanke and his chief deputies on the FOMC — Fed Vice Chairman Janet Yellen and New York Fed President William C. Dudley — have said in recent speeches that the committee’s leadership believes the threat from accelerating prices will prove “transitory.” Even so, policy makers have been bumping up their forecast for 2011 core inflation, which excludes food and fuel. The April projection is about 1.5 percent, compared with about 1.2 percent in January.

Restaurants have projected menu increases of 1.8 percent during the next six months, the most in a year, according to research by RBC Capital Markets. The amount depends on the type of food they serve, said Larry Miller, an RBC analyst in Atlanta. In the same period, the companies are forecasting a rise of at least 3.2 percent in their commodity costs, the research showed.

Rising Unemployment

The industry’s ability to pass along higher input costs depends on diners’ ability to pay more. The unemployment rate rose to 9 percent in April after dropping to 8.8 percent in March, still below a post-recession peak of 10.1 percent in October 2009. The Bloomberg Consumer Comfort Index fell to minus 46.2 in the week ended May 1, the second consecutive weekly decline.

Customer traffic still has improved from last year and “trends have been decent in terms of demand, so restaurants have a little more confidence to raise prices,” Miller said.

The Standard & Poor’s Supercomposite Restaurants Index, which includes McDonald’s Corp. (MCD), The Cheesecake Factory Inc. (CAKE) and 25 other companies, has risen by 43 percent since December 31, 2007, while the S&P 500 Index has declined by 8 percent.

BJ’s Restaurants Inc. (BJRI) expects to boost menu prices for the full year by about 3 percent to offset rising food and energy costs, Chief Executive Officer Gerald Deitchle said on an April 20 conference call. Like McDonald’s, the Huntington Beach, Calfornia-based company didn’t raise prices the past few years at its namesake brewery, pizza and grill chains, Deitchle said.

Cheesecake Factory, BJ’s and McDonald’s are among a group of “haves,” according to Steve West, an analyst at Stifel Nicolaus & Co. in St. Louis. These are restaurants that can push through moderate price changes, though they likely won’t be menu-wide, West said. He includes Chipotle Mexican Grill Inc. (CMG) in this group because it has focused on improving food quality and the customer experience during the recession.

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Japanese automakers have begun checking the level of radiation on cars to be exported from the country in a bid to ease worries among foreign consumers, an industry group said Friday.

The automakers will inspect radiation inside cars and on tires before shipment, said Hirokazu Furukawa, a spokesman for the Japan Automobile Manufacturers Association. No radiation has been detected so far on cars to be exported from Japan, he said.

“Some foreign consumers voiced concern over radiation. We want to erase their worries by taking this measure,” he said. Furukawa said he has not seen a fall in Japanese car sales abroad due to radiation concerns.

Japan has been struggling to contain radiation leaks since a tsunami on March 11 damaged a coastal nuclear power plant in northern Japan, causing radiation leaks. Furukawa said automakers are currently checking the level of radiation on cars to be shipped from eight ports.

Around 10 cars out every 5,000 are being checked for radiation, he said. The carmakers will continue the radiation check on vehicles until the nuclear crisis subsides.

Toyota Motor Corp. said it has checked the level of radiation on 30 cars to be shipped to the United States. Around 46 percent of Toyota cars made in Japan last year were shipped for export.

Around 30 percent of Honda Motor Co.’s cars made in Japan are for export. Over 50 percent of Nissan Motor Co.’s cars made in Japan are to be shipped abroad.

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Spain sold 4.13 billion euros ($5.9 billion) of three-year bonds and its borrowing costs fell after Portugal said it would seek a European Union bailout.

Spain sold the bonds at an average yield of 3.568 percent, compared with 3.592 percent when it sold debt of similar maturity on March 3, the Treasury said. Demand was 1.79 times the amount offered, compared with 3.04 times on March 3, and the amount sold compared with a maximum target of 4.5 billion euros.

The debt sale, hours after Portuguese Prime Minister Jose Socrates said he would ask the European Union for financial help, was a test of investor sentiment as Goldman Sachs Group Inc. said contagion from the sovereign debt crisis would stop at Portugal. Spain, in an attempt to distance itself from other so- called peripheral nations, is implementing the deepest budget cuts in at least three decades while trying to shore up savings banks suffering a surge in bad loans.

“The fact that Portugal seeks help early reduces contagion risk,” Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London, said by telephone. “The bonds have performed very well; any decline in Spanish bonds in the near-term is likely to come from their rich valuation rather than contagion concern.”

Yield Spread

The gap between Spanish and German 10-year borrowing costs was unchanged from yesterday after the sale at 180 basis points. That compares with a euro-era record of 298 basis points on Nov. 30 after Ireland became the second euro nation after Greece to seek a bailout. Spanish banking stocks rose, with Banco Santander SA (SAN) gaining 2 percent.

“We do not expect any other EMU sovereign to be in need of financial assistance,” Francesco Garzarelli, Goldman Sachs’s London-based chief interest-rate strategist, said in a report to clients payday loans. He expects the spreads between the yields of Italy, Spain, Belgium and those of AAA-rated economies like Germany to “slowly compress,” he said.

Bank of Spain Governor Miguel Angel Fernandez Ordonez said on March 5 that Portugal isn’t “very important” for Spanish banks. Spain has foreign claims amounting to $85 billion in Portugal, according to data from the Basel-based Bank of International Settlements. Portugal accounted for 9 percent of Spain’s global exports in 2010, according to Spanish Industry Ministry data.

Spain has overhauled labor and pension laws and pledged further measures to make its economy more competitive. It aims for a budget deficit of 6 percent of gross domestic product this year, compared with 9 percent last year when the shortfall was the third-largest in the euro region.

‘Right Things’

“Contagion to Spain will be extremely limited,” Guillaume Menuet, senior European economist at Bank of America Merrill Lynch, said in a telephone interview. “Spain has been doing all the right things and ticking all the boxes.”

Spain also adopted austerity measures including public-wage cuts earlier than Portugal’s Socialist Premier Socrates, who resigned on March 23 after failing to get parliamentary approval for his proposed budget cuts. Elections are scheduled in Portugal for June 5, making the negotiation of any EU bailout more difficult.

Spanish Prime Minister Jose Luis Rodriguez Zapatero has pledged to complete his four-year term. He announced on April 2 he won’t seek re-election, unleashing a leadership battle in the ruling Socialist Party after regional elections on May 22.

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Billionaire investor Carl Icahn, Dish Network and a pair of liquidation firms are among the bidders for video-rental chain Blockbuster in an auction Tuesday morning at U.S. Bankruptcy Court in New York.

The auction process is ongoing. Other bidders include a joint bid by liquidation firms Gordon Brothers Group and Hilco Merchant Resources, SK Telecom and a group of debtholders led by Monarch Alternative Capital LP.

At a break in the process on Tuesday, the debtholder group had the highest bid at $290 million including the assumption of $11.5 million in debt.

The bids will be used to pay off Blockbuster’s creditors. The buyer could try to keep operating the chain, or liquidate it.

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The yen and Swiss franc appreciated as radiation leaks from a damaged nuclear plant in Japan were discovered and a U.S.-led alliance prepared attacks on Libyan ground forces, boosting demand for the safest assets.

The pound traded near the highest in more than a year against the dollar before the Bank of England releases minutes of its March 10 meeting, which will reveal how many dissenting policy makers voted to raise interest rates, and Chancellor of the Exchequer George Osborne presents the national budget. The euro was little changed against the dollar before Portugal’s parliament votes on budget cuts that have divided lawmakers.

The yen strengthened 0.4 percent to 114.50 per euro at 9:11 a.m. in London and appreciated 0.3 percent to 80.76 per dollar. It rose against 14 of its 16 major counterparts. The euro slipped less than 0.1 percent to $1.4193, trimming its year-to- date gain to 5.7 percent.

“Yen and Swissie are regarded as safe havens, so if risk aversion rises they usually get some support,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “You’ve got the Libya crisis and extended problems in other countries in that region and the Japanese disaster. It’s pretty much a situation where it’s risk off.”

Levels of iodine unsafe for infants were reported in Tokyo tap water as workers struggled to reconnect power to the Fukushima Dai-Ichi nuclear plant, which was crippled by the March 11 earthquake and ensuing tsunami. Prime Minister Naoto Kan today ordered a halt to milk and parsley shipments from a prefecture between Fukushima and Tokyo after tests showed radiation leaked into the sea and tainted some food.

The Nikkei 225 Stock Average fell 1.7 percent after surging more than 7 percent in the previous two days on speculation that the nuclear crisis was easing.

Franc, Portugal

“The earthquakes in Japan are spurring risk aversion and the losses in stocks,” said Takashi Kudo, general manager of market information services in Tokyo at NTT SmartTrade Inc., a unit of Japan’s biggest phone company. “This is resulting in buying of the yen.”

Switzerland’s franc rose against all of its major peers, appreciating 0.5 percent to 1.2765 per euro and strengthening 0.4 percent to 90.01 centimes per dollar.

Portugal’s Prime Minister Jose Socrates will today face a vote against his deficit-cutting plan, which threatens to push the country toward early elections and the need for a European Union bailout need a personal loan with bad credit.

Socrates has been attempting to reach a compromise with opposition parties, “but the opposition does not seem to buy into this,” Nicola Mai, a London-based economist at JPMorgan Chase & Co., wrote in a note to investors. “The likelihood that the Portuguese government will fall this week looks high.”

‘Inflation Risks’

EU leaders are divided over how to let a euro-region stopgap fund spend its full capacity of 440 billion euros ($624 billion) to ease the region’s credit woes as a March 24-25 summit approaches. Policy makers have settled on a permanent rescue fund able to lend 500 billion euros as of 2013.

“People are looking at two things this morning: Portugal and the U.K.,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “Maybe Portugal’s austerity budget won’t go through, and they will go cap in hand for a bailout. That could be weighing on the euro a little bit. Most of the good news is already priced in.”

The pound slipped less than 0.1 percent to $1.6357 and was also little changed against the euro. Sterling reached $1.6401 yesterday, the highest since January 2010, after inflation data beat forecasts and spurred bets on interest-rate increases.

Bank of England

The U.K. central bank kept its benchmark rate on hold at 0.5 percent on March 10, even as inflation remained above its 2 percent target. Minutes of that gathering are due for release at 9:30 a.m. in London and will show how many of the central bank’s nine policy makers voted to raise borrowing costs.

“The market has moved to price in a July hike, though a May move alongside the next inflation report has advocates too,” David Watt, senior currency strategist at RBC Dominion Securities Inc. in Toronto, wrote in a note to clients.

South Korea’s won slid for the first time in four days as oil rose on unrest in Libya and the Standard & Poor’s 500 Index declined in New York yesterday.

“We had a weaker session in U.S. equities and there’s also renewed concerns developing in Europe, so that’s spilling over to risk sentiment in Asia,” said Thomas Harr, head of Asian foreign-exchange strategy at Standard Chartered Plc in Singapore.

The won fell to 1,124.35 per dollar from 1,120.95 yesterday.

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Stephanie Bilbija, a university student and single mom, will have to save for a few more years before she’s a home owner, thanks to new mortgage rules that may force some Canadians to think twice about whether they’re ready to jump into the market.

The new rules as of Friday will make the maximum payback period 30 years

Canada’s economy accelerated more than forecast from October to December on the biggest jump in exports since 2004 and faster consumer spending.

Gross domestic product expanded at a 3.3 percent annual pace in the fourth quarter following a 1.8 percent expansion in the previous three months that was higher than initially estimated, Statistics Canada said today in Ottawa. Economists predicted a 3 percent fourth-quarter gain, according to the median of 23 estimates gathered by Bloomberg News.

The country’s dollar reached a three-year high as the report boosted confidence that Bank of Canada Governor Mark Carney will raise interest rates later this year. Economists predict the key rate will remain 1 percent at tomorrow’s scheduled announcement and rise in the second quarter according to economists surveyed by Bloomberg News.

“There is pretty nice momentum going into the first quarter,” said Jacqui Douglas, a senior economics and currency strategist at TD Securities in Toronto. “It looks like global growth is starting to help Canada,” said Douglas, who predicts a July rate increase.

Canada’s dollar appreciated 0.4 percent to 97.35 cents per U.S. dollar at 9:44 a.m. in Toronto, from 97.74 on Feb. 25. It touched 97.28 cents, the strongest since Feb. 28, 2008. One Canadian dollar purchases $1.0272.

Faster Growth

The June bankers’ acceptance contract yield, which is tied to forecasts about the central bank rate, rose to 1.48 percent today from 1.45 percent on Feb. 25.

Carney told reporters at a G-20 meeting in Paris Feb. 19 that fourth-quarter growth could be faster than the 2.3 percent rate the bank had forecast in January.

Statistics Canada also reported today that the country’s fourth-quarter current account deficit narrowed to C$11 billion from a revised record C$17 billion shortfall. Economists predicted a C$9.7 billion deficit the measure of trade in goods, investment and services. The trade balance swung to a C$523 million surplus from a record deficit of C$6.42 billion in the third quarter, as exports rose and imports fell.

On a monthly basis, gross domestic product rose 0.5 percent in December, the fastest pace in nine months, as oil and gas companies boosted production. Economists forecast a 0.3 percent gain based on the median of 21 responses to a Bloomberg survey.

Boosting Investment

Companies such as Suncor Energy Inc. and Canadian National Railway Co. are boosting investment as the recovery takes hold. Rio Tinto Group, the world’s third-largest mining company, approved a $277 million expansion at its Iron Ore Co. of Canada unit on Feb. 8, to increase output as prices rise.

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Witnesses in Ivory Coast say an opposition meeting was disrupted by security forces loyal to the incumbent leader who refuses to cede power.

Witnesses said military police arrived as the meeting was being set up Saturday by supporters of Alassane Ouattara, who was internationally recognized as the winner of November’s presidential poll. Witnesses say police fired tear gas and live rounds into the air before setting fire to the podium.

Ouattara’s prime minister called on followers this week to take to the streets in an Egypt-style uprising against incumbent leader Laurent Gbagbo free business cards. Gbagbo declared a nationwide curfew on Friday through the weekend.

The international community had said it would use financial sanctions to dislodge Gbagbo.

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