BLBG:Treasury Yield 6 Basis Points From Record Low
Treasury 10-year yields, the benchmark for borrowing costs around the world, were six basis points from the record low as euro-area officials argued over how to keep the 17-nation currency bloc together.
Yields tumbled to their lowest-ever levels in Germany and the U.K. yesterday as investors sought the relative safety of the highest-rated debt. A $29 billion seven-year Treasury auction today is poised to draw a record-low rate. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he sees deflation. Fidelity Investments, which oversees $1.62 trillion, said Treasuries offer value.
“There’s a fear in the market from Europe,” said Hajime Nagata, who invests in Treasuries in Tokyo at Diam Co., which manages the equivalent of $124.7 billion and is an arm of Dai- ichi Life Insurance Co., Japan’s second-biggest life insurer. “I don’t expect yields to go higher. I’m still relatively bullish on the Treasury market.” Nagata said he added to his holdings this week.
U.S. 10-year yields were little changed at 1.73 percent at 8:13 a.m. London time, Bloomberg Bond Trader data show. The record low was 1.67 percent set Sept. 23. The 1.75 percent security due May 2022 changed hands at 100 5/32.
German, U.K. Rates
Ten-year rates tumbled to 1.376 percent in Germany and 1.757 percent in the U.K. yesterday.
Germany has “huge difficulties” with France’s call for joint borrowing by euro governments, Chancellor Angela Merkel told reporters in Brussels early today after six hours of talks. European leaders also called on Greece to stick with budget cuts needed to stay in the euro.
There’s “more than a whiff of deflation out there,” Gross wrote yesterday on Twitter.
Investors demand 2.51 percentage points of extra yield to buy 30-year bonds instead of two-year notes. The spread narrowed to 2.48 percentage points on May 17, a seven-month low. Thirty- year bonds are more sensitive to inflation because of their long maturity.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.16 percentage points, in line with the average over the past decade.
Flight to Quality
Robert Brown, president of the bond unit at Boston-based Fidelity, said Treasuries will continue to benefit from the flight to quality. Ten-year yields may fall to 1.5 percent, he said yesterday on Bloomberg Television’s “Street Smart” with Adam Johnson and Trish Regan.
“We are looking at a period of significant volatility,” Brown said. “Our number one focus is preserving principal.”
The seven-year notes being sold today yielded 1.18 percent in pre-auction trading. The rate was 1.347 percent at the last sale of the securities on April 26, which was the least ever.
Investors bid for 2.83 times the amount offered last month, the same as the average for the past 10 auctions.
Treasuries have rallied on concern Greece will abandon the euro as it combats a recession, leading other nations in the currency bloc to consider doing the same.
“Treasuries are expensive,” said Peter Jolly, the Sydney- based head of market research at National Australia Bank Ltd. (NAB) “Yields are at the bottom end of the range. To pierce these lows, some of the risks that we’re talking about are going to need to materialize.”
Year-End Outlook
Ten-year rates will increase to 2.45 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings. Jolly predicts 2.5 percent.
The Federal Reserve plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today, according to the Fed Bank of New York’s website. The purchases are part of the bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to support the economy by keeping borrowing costs down.
A U.S. government report today will probably show orders for durable goods rose 0.2 percent in April, after falling a revised 3.9 percent in March, a Bloomberg News survey of economists shows. China’s manufacturing may shrink for a seventh month, a private purchasing managers’ index showed today.
Treasuries returned 1.2 percent this month as of yesterday, Bank of America Merrill Lynch indexes show, reflecting demand for the relative safety of U.S. debt. Investors tracking the MSCI All-Country World Index of stocks lost 8.3 percent over the same period, including reinvested dividends.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
