By Keith Jenkins and Wes Goodman May 5 (Bloomberg) -- Ten-year Treasury yields reached their lowest since February amid concern Greece’s government may struggle to push through the budget cuts needed to garner a European Union-led aid package and help it avoid a default. Two-year notes rose and the 10-year yield held most of yesterday’s 9 basis-point decline as stock markets fell around the world. Greek air-traffic controllers, teachers and shopkeepers are striking today to challenge Prime Minister George Papandreou’s latest decision to cut wages and pensions and raise taxes. The MSCI World Index of shares dropped 0.5 percent. The U.S. will announce the size of next week’s debt sales today. “Risk aversion is gripping the markets,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “Near-term direction in Treasuries is being dictated by what’s going on internationally.” The 10-year yield climbed less than 1 basis point to 3.60 percent as of 7 a.m in New York, according to BGCantor Market Data. It earlier slipped to 3.58 percent, the lowest level since Feb. 26, according to generic data compiled by Bloomberg. The two-year yield fell 2 basis points to 0.92 percent. ‘Complete Madness’ Ten-year yields have declined from the 4.01 percent they reached on April 5, the highest level since October 2008, as concern Greece would default on its debt spurred investors to buy U.S. government securities. Greek bonds declined today, with investors demanding an extra 6.93 percentage points in yield to hold the debt instead of German bunds, the most since April 29. Treasuries surged yesterday even as Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed as “complete madness” speculation that Spain would need a Greek-style bailout. “There is a real risk of contagion” in Europe, said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by Liechtenstein‘s royal family. “Treasuries and the dollar have become safe havens. The worse it gets, the easier it becomes for the U.S. to sell its debt.” The Treasury may cut the amount of three-year securities it sells next week, the first decrease in the monthly note auction since before the collapse of global credit markets. The U.S. will sell $39 billion of three-year notes on May 11, versus $40 billion in April, according to the median estimate in a survey of the primary dealers that trade with the Federal Reserve. Next week’s sales will also include $25 billion of 10-year debt on May 12 and $16 billion in 30-year bonds the following day, the survey showed. Heightened ‘Uncertainty’ “Amid the heightened global sovereign uncertainty related to budget deficits, if the U.S. government is among the first to demonstrate a decline in borrowing needs, the status of U.S. Treasuries vis-à-vis other global government bond markets should improve,” analysts led by George Goncalves, head of interest- rate strategy in New York at primary dealer Nomura Holdings Inc., wrote in a note to clients. Treasury yields will still rise this year as economic growth quickens, said Yusuke Tanaka, a senior dealer in Singapore at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded bank. “The economy continues to recover.” Tanaka said he’d consider shorting two-year futures contracts if the notes’ yield falls to 0.80 percent. A short position is a bet prices will fall. Economic reports may indicate the recovery is gaining traction, according to economists polled by Bloomberg. The Institute for Supply Management’s index of non- manufacturing businesses, covering almost 90 percent of the economy, rose to 56 in April, the highest since May 2006, according to a survey before the data are released today. U.S. companies hired 30,000 workers last month, after a 23,000 decline in March, a Bloomberg survey showed before the report from ADP Employer Services today. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

Source