BLBG:Treasuries Snap Gain Before Three Debt Sales This Week
Treasuries advanced for a third day as Greek leaders struggled to form a new government, underscoring political risk in the euro region and boosting demand for the safest assets.
Benchmark 10-year yields approached the lowest level since February as Greece faced the prospect of becoming the first developed nation to default on its debt, two months after forcing through the biggest-ever sovereign bond restructuring. Three-year Treasury yields also approached the lowest since February as the government prepared to sell $32 billion of the securities today in the first of three auctions this week totaling $72 billion.
“There’s renewed uncertainty about the Greek political situation and the nation’s ability to form a government coalition and this is a support for Treasuries,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen- Thueringen in Frankfurt. “For the time being the European crisis is the dominant theme, supporting safe-haven flows.”
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.86 percent at 10:39 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2022 advanced 7/32, or $2.19 per $1,000 face amount, to 101 11/32. The yield declined to 1.82 percent yesterday, the lowest since Feb. 3.
Greek Leaders
Greece’s political leaders are struggling to find the support needed to form a coalition government after voters turned to anti-bailout parties at the May 6 election, calling into question the country’s ability to impose the measures needed to guarantee its future in the euro.
The government taking office after this weekend’s election has 30 days to decide whether to make today’s interest payment on 20 billion yen ($250 million) of 4.5 percent notes maturing in 2016, or default.
“Greece is rather chaotic at the moment and there is a risk of it turning into a situation where it could leave the euro and default on its debt,” said Allan von Mehren, a fixed- income strategist at Danske Bank A/S in Copenhagen. “There’s a risk that if that happens other countries might do the same and there could be a run on the euro. It’s not our central case, but it is a risk and that is giving support to Treasuries.”
The gain in Treasuries was tempered before this week’s supply. In addition to today’s three-year auction, the government will sell $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on May 10.
‘Very Expensive’
Ten-year notes yield 1.6 percentage points more than the upper end of the Federal Reserve’s target range for overnight bank loans, the smallest difference in three months, based on closing prices. The average over the past five years is 2.08 percentage points.
“The market is very expensive,” said Kei Katayama, who helps oversee the equivalent of $62 billion in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second-largest securities company. “If the European situation clears up, then Treasury prices should correct.”
Ten-year yields will climb to 2.25 percent by the end of the second quarter, according to analysts’ forecasts compiled by Bloomberg. They will rise to 2.52 percent by year-end, a separate survey shows.
The percentage of Treasuries in Katayama’s debt holdings is less than the allocation of U.S. government securities in the indexes he uses to gauge performance. Katayama said it’s a position he has kept through this year.
Debt Sale
Three-year yields dropped one basis to 0.36 percent after falling to 0.35 percent on May 7, the lowest since Feb. 8.
The securities scheduled for sale today yielded 0.37 percent in pre-auction trading, compared with 0.427 percent the previous time the notes were sold on April 10. Investors bid for 3.36 times the amount of available debt last month. The average over for the past 10 sales is 3.38.
Three-year notes have returned 0.2 percent this year, while 10-year securities advanced 1 percent, Bank of America Merrill Lynch indexes show. Thirty-year bonds, which are among the most sensitive to inflation because of their long maturity, tumbled 2.3 percent.
Treasuries gained on May 4 when the Labor Department said U.S. employers added 115,000 jobs in April, fewer than the projection of 160,000 in a Bloomberg News survey. The unemployment rate to a three-year low of 8.1 percent as people left the labor force. Elections in Greece and France two days later boosted demand for the relative safety of U.S. securities.
“In the coming months, Treasuries should be well supported,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “It’s a safe- haven asset.” BNP’s U.S. arm is one of the 21 primary dealers that are required to bid at government debt sales.
Bank of America’s MOVE index, which measures Treasury price swings based on options, fell to 56.7 basis points yesterday, the lowest level in almost five years.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
