BLBG: Treasuries Set for Fifth Weekly Gain as European Leaders Debate Greece Aid
Treasuries headed for a fifth weekly gain as speculation European leaders will fail to contain the Greek debt crisis boosted demand for the safest securities.
Benchmark 10-year yields were four basis points from this year’s low after former Federal Reserve Chairman Alan Greenspan said a default by Greece was “almost certain” and may help drive the U.S. economy into recession. The Fed will buy as much as $2 billion of Treasury Inflation Protected Securities today as part of its plan to purchase $600 billion of U.S. debt.
“Behind the resilience of Treasuries is uncertainty surrounding the Greek debt problem,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest bank by market value. “Whether Greece will be rescued has yet to be made clear, and the market dislikes it.”
The benchmark 10-year note yielded 2.93 percent as of 7:02 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent security due in May 2021 traded at 101 21/32. Yields, which have fallen four basis points this week, dropped to 2.88 percent yesterday, the lowest level since Dec. 1.
German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet today in Berlin to discuss a rescue package for Greece. European Union finance ministers agreed on June 14 to convene again on June 19 after they failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new plan for Greek aid.
Default Likely
The cost of protecting Greek bonds against default for five years climbed to a record 2,236 basis points yesterday, indicating traders expect the nation will fail to pay its debts.
The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” Greenspan, who ran the Fed from 1987 to 2006, said in an interview yesterday with Charlie Rose. That may leave some U.S. banks “up against the wall” and has the potential to push the U.S. into another recession, he said.
Treasury volatility is the highest in two months, according to Bank of America Merrill Lynch’s Move index. The gauge, measuring price swings based on over-the-counter options maturing in two to 30 years, rose to 87.90 yesterday, the most since April 8.
Yields Too Low
Demand for Treasuries was tempered today on speculation this year’s decline in yields has pushed rates too low to compensate for quickening inflation.
Ten-year notes yield 64 basis points less than the inflation rate, compared with a so-called real yield of positive 184 basis points at the start of the year. Consumer prices climbed 3.6 percent in May from a year earlier, the biggest year-over-year gain since October 2008, the Labor Department said June 15.
Economists predict an industry report today will show an index of leading indicators rose in May. The Conference Board’s gauge of the outlook for the next three to six months climbed 0.3 percent after a 0.3 percent decline in April, according to a Bloomberg News survey.
“I’m bearish on Treasuries,” said Kei Katayama, who helps oversee the equivalent of $62 billion as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd. “There will be ups and downs in the U.S. economy, but it’s not so weak that it requires additional monetary easing.”
Treasuries have returned 0.7 percent in June, poised for a third-monthly gain, according to an index compiled by Bank of America Merrill Lynch.
The Fed is scheduled to buy $1.5 billion to $2 billion in TIPS maturing in April 2013 to February 2041 today, according to its website. The central bank’s $600 billion debt-purchase program will end this month.
“Just the ending of the daily purchases by the Fed will give upward pressure to Treasury yields,” Katayama said.
Japan’s bonds rose. Five-year yield fell 2.5 basis points to 0.405 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.4 percent security due June 2016 added 0.122 yen to 99.975 yen.
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net.
To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net
