BLBG: Treasuries Gain, Yields Approach One-Year Low, on Safety Bid
By Paul Dobson and Wes Goodman
May 24 (Bloomberg) -- Treasuries rose, pushing 10-year yields toward a one-year low, as the euro declined on concern Europe’s fiscal crisis will slow economic growth, boosting demand for the safety of U.S. fixed-income securities.
The difference in yield between two-year and 10-year notes narrowed for a fifth day before the U.S. auctions $113 billion of debt due in seven years and less this week, down from $118 billion the last time it sold similar-maturity securities last month. Treasuries headed for their biggest monthly gain since March 2009 as a Bank of Spain takeover of a failing lender heightened speculation Europe’s debt crisis was spreading.
“It’s still a risk-off environment,” said OrlandoGreen, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “Supply is coming down and that’s a good sign for the market. The risk environment does still favor quality-paper bonds so the sale should go well.”
The yield on the benchmark 10-year note fell three basis points to 3.21 percent as of 10:20 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 rose 8/32, or $2.50 per $1,000 face amount, to 102 13/32. The yield dropped to 3.10 percent on May 21, the lowest since May 18, 2009.
The two-year note yield fell one basis point to 0.76 percent, narrowing the yield spread with the 10-year note to 245 basis points.
Greek Default Concern
Treasuries have returned 2.18 percent this month, compared with 2.26 percent in March 2009, Bank of America Merrill Lynch indexes show. Concern countries such as Greece would default on their debt helped send the U.S. yield down from the 2010 high of 4.01 percent it reached on April 5.
The euro dropped 1 percent to $1.2438 after reaching a four-year low of $1.2144 last week. The Bank of Spain said on May 22 it appointed a provisional administrator to run CajaSur, a savings bank crippled by property loan defaults. The lender, based in the city of Cordoba, Spain, and controlled by the Roman Catholic Church, will be run by the government’s bank restructuring fund, the regulator said.
Treasury Secretary Timothy F. Geithner, meeting in Beijing with Chinese leaders, said the U.S. and China are well placed to withstand the European financial crisis, with both nations experiencing stronger-than-expected global recoveries.
Investors lost confidence in a global economic recovery because of the European debt crisis, Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York, wrote to clients today.
Good for Bonds
“Last week was a good week for bonds,” Weinberg wrote. “With traction for a deflationary world economy rising all week, bond markets rallied universally.”
German bonds rose 2.3 percent this month, while U.K. gilts rallied 3.1 percent, the Bank of America figures show.
The U.S. is scheduled to sell $42 billion of two-year notes tomorrow, $40 billion of five-year securities on May 26 and $31 billion of seven-year debt on May 27.
Investors became less bearish on the outlook for U.S. government debt through the middle of the year, according to a weekly survey by Ried Thunberg ICAP Inc., a unit of ICAP Plc, the world’s largest inter-dealer broker.
Ried Thunberg’s sentiment index advanced to 47 for the seven days ended May 21, matching the year-to-date high, from 46 the week before. A figure of less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 28 fund managers.
Strips Outperform
An 18-month slump in Treasury zero-coupon bonds is giving way to rising demand as the rate of inflation falls to a 40-year low, turning so-called Strips into the best performers in the U.S. government debt market.
Investment banks increased the securities -- created by separating the interest and principal payments of a bond and selling them at a discount -- by 4.4 percent to $179.4 billion from December through April, according to Treasury Department data. It’s the first time that the market expanded for five straight months since 2006.
The call for Strips, which started in 1985 after former Federal Reserve Chairman Paul Volcker broke the back of inflation, suggests growing bullishness toward the bond market after the Bank of America Merrill Lynch U.S. Treasury Master Index fell 3.7 percent in 2009.
Yields on Treasury Inflation-Protected Securities show money managers expect the consumer price index to increase an average 1.96 percent annually in the next 10 years, down from 2.43 percent as recently as April 29. The figure was as low as 1.83 percent on May 21, the least since Oct. 9.
“We are in some sort of a new normal environment and inflation is not going to be a problem anytime soon,” said Jeffrey Caughron, an associate partner in Oklahoma City at Baker Group Ltd., which advises community banks investing $20 billion of assets and is recommending that some clients buy zero-coupon Treasuries.
To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net;
