BLBG: Treasury 10-Year Yields Near Two-Week Low on Rates Speculation
By Matthew Brown and Theresa Barraclough
March 18 (Bloomberg) -- Treasury 10-year yields reached the lowest in almost two weeks as investors raised bets the Federal Reserve will keep interest rates on hold until late this year.
The difference in yield between benchmark two- and 10-year yields stayed near the least since Jan. 1 before a report that’s forecast to show U.S. consumer price inflation slowed in February, adding to reasons for the central bank to wait before increasing the target rate. The Fed said March 16 that rates will stay low for an “extended period.” Greece may approach the International Monetary Fund for aid next month, Dow Jones reported, boosting demand for the safest assets.
“The Treasury market is being supported by the expectation that rates will stay low,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “There is more confusion regarding Greece than concern.”
The yield on the 10-year note fell 1 basis point to 3.63 percent as of 10:15 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due February 2020 climbed 2/32, or 63 cents per $1,000 face amount, to 99 30/32. The yield dropped earlier to 3.62 percent, the lowest since March 5.
The 10-year yield declined 21 basis points this year as indications the economic recovery has yet to gain traction boosted speculation the Fed will keep the target rate in the range of zero to 0.25 percent.
Consumer Prices
There is a 78 percent probability that the Fed won’t raise rates at its August meeting, according to futures on the CME Group Inc. exchange. That compares with 70 percent a week ago.
U.S. consumer prices climbed 0.1 percent last month after gaining 0.2 percent in January, according to a Bloomberg survey before a Labor Department report today. The government yesterday said wholesale prices fell more than economists expected in February.
“Inflation expectations will decline, which will cause the yield curve to flatten,” said Hiromasa Nakamura, a senior investor who helps oversee the equivalent of $21.1 billion in Tokyo at Mizuho Asset Management Co., part of Japan’s second- largest bank by assets. “I definitely recommend buying longer- term Treasuries.”
The difference between two- and 10-year yields was little changed at 2.73 percentage points. The spread shrank to 2.71 percentage points yesterday, the narrowest since Jan. 4.
‘Steepeners, Flatteners’
“Steepeners have been in place for a long time and made a lot of money for a lot of people,” said Andrew Roberts, head of European rates strategy at Royal Bank of Scotland Group Plc in London. “Turning those bets into flatteners is like turning an oil tanker; it will take a long time.”
The premium that investors demand to hold seven-year Treasuries over two-year notes will fall to below 200 basis points in the next three months, Roberts said. The so-called yield spread was at 217 basis points today, down from a seven- month high of 237 basis points on Jan. 11.
Greece may seek financial aid from the IMF over the April 2 to April 4 Easter weekend, Dow Jones said, citing a senior Greek official it didn’t name.
Michael Meister, the chief finance spokesman for German Chancellor Angela Merkel’s party, said yesterday that Greece should turn to the IMF if it needs aid, a reversal that signals a rift with European leaders Jean-Claude Trichet, Jean-Claude Juncker and Nicolas Sarkozy.
Euro Exclusion
Merkel said Europe needs better rules to police nations sharing the euro and may exclude countries that fail to meet their obligations, according to the New York Times.
Greece doesn’t need money from the International Monetary Fund, Greek Prime Minister George Papandreou told a European Parliament committee in Brussels today.
“Greece may have to choose the option to go to the IMF,” he said. “We hope that that will not be necessary.”
Gains in Treasuries were tempered before the U.S. announces the amount of bonds it plans to sell next week.
The government will sell $44 billion of two-year notes on March 23, $42 billion in five-year debt the following day and $32 billion of seven-year securities on March 25, according to estimates from Wrightson ICAP LLC, an economic advisory firm in Jersey City, New Jersey. The estimates match the sizes of last month’s auctions of the same maturities.
President Barack Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.
Treasuries are down 0.2 percent this month after returning 0.4 percent in February and 1.6 percent in January, according to Bank of America Merrill Lynch indexes.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
