Treasuries rose, with 10-year notes snapping a three-day decline, as speculation Greece is moving toward exiting the euro boosted demand for the relative safety of U.S. government debt.
Ten-year yields dropped to within six basis points of a record low after Pacific Investment Management Co.’s Richard Clarida said a Greek decision to leave the common currency would bring “collateral damage” and fuel a rally in Treasuries. The U.S. is scheduled to sell $35 billion of five-year notes, after demand approached the most ever at a two-year auction yesterday. European leaders will meet today for a summit in Brussels.
“The run into the Greek election and the subsequent bickering around forming a coalition is going to keep risk appetite relatively subdued,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “If the news flow doesn’t improve it’s going to keep Treasury yields pressured to the downside. We’ve got the auction a bit later, which might see markets attempting to keep Treasuries at bay.”
The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 1.74 percent at 7:25 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 1/4, or $2.50 per $1,000 face amount, to 100 2/32. The yield dropped as low as 1.73 percent, approaching the record 1.67 percent set on Sept. 23.
Former Greek Prime Minister Lucas Papademos said some European states were considering contingency plans for a Greek exit from the shared currency, Dow Jones reported yesterday. CNBC quoted Papademos as saying that no preparations are under way in Greece.
‘Collateral Damage’
“If Greece exits, there will be collateral damage,” Clarida, the global strategic adviser at Pimco, said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “It will show up in the U.S., it will show up in global stock prices, it will show up in credit spreads,” resulting in a flight to safety that strengthens the dollar and lowers Treasury yields, he said. Pimco runs the world’s biggest bond fund.
The Stoxx Europe 600 Index (SXXP) declined 1.6 percent, and the euro dropped as low as $1.2615, the weakest since August 2010. Yields on German five- and 30-year bunds fell to records.
The cost of insuring against default on European sovereign debt rose, according to BNP Paribas SA. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbed 0.5 basis point to 310.5 basis points. Credit-default swaps are contracts investors use to bet on the creditworthiness of a borrower. An increase signals deterioration in perceptions of credit quality.
‘Curb the Rally’
Treasuries have returned 0.8 percent this month, and 8.7 percent over the past year, according to indexes compiled by Bank of America Merrill Lynch.
Today’s European summit may curb the rally, said Tsutomu Komiya, who helps oversee the equivalent of $111 billion as an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan’s second-biggest brokerage.
“There is merit to Greece remaining in the euro zone,” Komiya said. “The negotiations will improve. The flight to quality will stop, and Treasury yields will rise.” Ten-year rates will probably be capped at 2 percent in the weeks ahead, he said.
Fed Buying
The Fed plans to buy as much as $2 billion of Treasuries due from August 2022 to February 2031 today, according to the Fed Bank of New York’s website. The central bank also plans to purchase as much as $5 billion of securities maturing from May 2018 to May 2020 as part of a program to replace $400 billion of shorter-term debt in its holdings with longer maturities to support the economy by keeping down borrowing costs.
New home sales rose 2.1 percent in April, following a 7.1 percent decline in March, a Bloomberg News survey of economists showed before the Commerce Department report today.
The five-year notes being sold today yielded 0.76 percent in pre-auction trading, poised to break the all-time low of 0.88 percent set in December.
Investors bid for 3.09 times the amount offered at the previous sale of the securities April 25, versus the average of 2.93 for the past 10 auctions.
At yesterday’s $35 billion two-year sale, investors bid for 3.95 times the amount of securities available, the most since the record high of 4.07 in November.
The government is scheduled to conclude this week’s auctions with $29 billion of seven-year securities tomorrow.
Market participants are cutting their yield predictions. The 10-year rate will be 2.45 percent by year-end, a Bloomberg survey of banks and securities companies shows, with the most recent forecasts given the heaviest weighting.
Robert Carnell at ING Bank NV in London trimmed his 10-year forecast to 1.9 percent from 2 percent, based on figures provided yesterday for the survey. Ian Shepherdson at High Frequency Economics Ltd. in Valhalla, New York, reduced his figure to 2.5 percent from 3 percent.
The 10-year yield may meet resistance if it declines to its record-low 1.67 percent, according to data compiled by Bloomberg. Resistance refers to an areas where orders to sell a security may be clustered.
-- With assistance from TJ Marta in New York. Editors: Paul Dobson, Nicholas Reynolds
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
