SF: Treasury Two-Year Yield Drops to Record Low on Global Slowdown
June 29 (Bloomberg) -- Treasuries rose a day before the quarter ended, pushing two-year note yields to a record low, on a slowing global economic recovery and a European Central Bank lending facility about to expire.
U.S. government bonds were headed for their best quarter since the 2008 financial crisis as reports showed U.S. consumer confidence fell this month more than economists forecast and an index of China's leading economic indicators had its smallest gain in April in five months.
"The market priced in too optimistic of a recovery, and investors who were bearish are being forced to buy," said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of 18 primary dealers that trade directly with the Federal Reserve. "We are coming up on the quarter-end, and investors want to be in cash, which is supporting the front end."
The yield on the two-year note fell two basis points, or 0.02 percentage point, to 0.61 percent at 10:05 a.m. in New York, according to BGCantor Market Data. The price of the 0.625 percent security maturing in June 2012 increased 1/32, or 31 cents per $1,000 face amount, to 100 1/32.
The two-year yield slid earlier to the all-time low of 0.5857 percent on concern the global recovery is stalling. The previous record of 0.6044 percent was set Dec. 17, 2008, after the Fed cut its target for overnight bank lending to a range of zero to 0.25 percent.
Longer Maturities
Demand for longer maturities pushed the 10-year yield down six basis points to 2.96 percent after touching 2.95 percent, the lowest level since April 28, 2009. The 30-year bond yield touched 3.95 percent, the least since Oct. 2, 2009.
Treasuries also rose as U.S. buyers sought to increase the duration of portfolios to match their benchmarks at the end of the second quarter.
Barclays Plc's Treasury index is expected to extend by 0.06 years at the end of June, compared with 0.09 years for the month of May, according to the firm, a primary dealer.
A gauge of China's economic outlook compiled by the New York-based Conference Board rose 0.3 percent in April, less than the 1.7 percent gain it reported June 15. The Conference Board said in an e-mailed statement that the previous reading contained a calculation error for floor space on which construction began.
Greece and Spain led a surge in the cost of insuring against losses on sovereign debt to near a record as protests over austerity measures and concern banks may struggle to fund themselves triggered a credit-market sell-off.
Default Swaps
The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments rose 5.5 basis points to 164, the highest level in three weeks and approaching the all-time high of 168.5 on June 4, according to CMA DataVision. Corporate risk gauges climbed the most in more than a month.
The Standard & Poor's 500 Index lost 2.4 percent. The euro dropped to 107.62 yen, the lowest since November 2001. Crude oil for August delivery fell 3.7 percent to $75.36 a barrel.
U.S. government securities have returned 4.4 percent this quarter, according to Bank of America Merrill Lynch indexes, as the 10-year yield plunged from its 2010 high of 4.01 percent reached on April 5.
The last time Treasuries rallied as much was when they gained 9 percent in the last three months of 2008 as credit markets froze around the world following the collapse of Lehman Brothers Holdings Inc. in September of that year.
"There's low inflation and the economy is showing signs of weakness," said Sean Murphy, Treasury trader in New York at Societe Generale. "The market is telling you that the deflationary theme is prevalent. Expectations for a Fed hike moved from the end of the 1st quarter 2011 to the end of 2011."
Consumer Sentiment
The Conference Board's index of consumer confidence fell to 52.9 in June from a revised 62.7 in the prior month, the Conference Board reported. The median forecast of 71 economists in a Bloomberg News survey was for a decrease to 62.5 from a previously reported 63.3. U.S. employment figures later this week will show the nation lost 115,000 jobs in June, according to the median forecast in a separate survey.
"Inflation is unlikely to accelerate in the near term," Mihir Worah, an investor at Newport Beach, California-based Pacific Investment Management Co. said on the company's website. "As we move into 2011, and the latter half of 2011, we are likely to see signs inflation is gathering momentum."
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was at 1.92 percentage points, down from this year's high of 2.49 percentage points in January.
Fed Rate View
Futures on the CME Group Inc. exchange show an 18 percent chance the Fed will increase its target lending rate by at least a quarter-percentage point by its December meeting, compared with 36 percent odds a month ago.
The 10-year yield on will fall to 2.75 percent as the Fed steps up efforts to fight deflation, said Deutsche Bank AG, a primary dealer.
"While we fear inflation is the biggest longer-term concern, we see deflation as the bigger near-term risk," Jim Reid, head of fundamental strategy in London, wrote in a research note today.
