BLBG:Treasuries Head For 2nd Monthly Gain On Euro Debt Crisis
Treasuries headed for their first two-month gain this year as Europe’s crisis threatened to break up the 17-nation currency bloc and slow global economic growth.
U.S. government securities returned 2.6 percent from the end of March through May 25, according to Bank of America Merrill Lynch indexes, reflecting demand for the relative safety of the nation’s debt. Investors tracking the MSCI All-Country World Index of stocks lost 9.3 percent. Treasury yields are poised to “grind lower,” according to Deutsche Bank AG, as European governments struggle to cut spending.
“I turned bullish a while ago on Treasuries and I still am,” said Hans Goetti, the Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which manages the equivalent of $1.5 billion in assets. “Austerity in Europe is clearly deflationary.”
Benchmark 10-year yields were little changed at 1.75 percent as of 6:37 a.m. in London, according to Bloomberg Bond Trader prices. The yield was eight basis points from the record low of 1.67 percent set Sept. 23. The price of the 1.75 percent security due in May 2022 was 100.
U.S. 10-year rates may decline to 1.4 percent or lower, tracking the tumble in German yields, Goetti said. Ten-year bund rates slid to 1.351 percent on May 24, the least ever. Goetti said he has been buying U.S. debt for the past 12 months.
Treasuries trading was shut yesterday for Memorial Day in the U.S.
Inflation Expectations
The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt was 2.14 percentage points. The figure is in line with the average over the past decade. Deflation is a general drop in prices often as part of an economic slowdown.
Japan’s rate slid two basis points, or 0.02 percentage point, to 0.855 percent today. It was as low as 0.815 percent on May 18, the least since 2003.
Spanish bonds fell yesterday, pushing 10-year yields up to 6.48 percent, on concern the nation’s lenders will need additional financial support to weather Europe’s debt crisis.
The extra yield investors demand to hold the securities instead of their German counterparts widened to 5.14 percentage points, the most since the euro’s introduction in 1999.
Deutsche Bank, one of the 21 primary dealers that trade directly with the Federal Reserve, is skeptical of trades that add risk, according to its report May 25.
‘Grind Lower’
“We remain buyers of Treasuries on dips,” Dominic Konstam, the global head of interest rate research in New York for the bank, wrote in the report. “We continue to expect Treasury yields to grind lower.”
Treasuries aren’t attractive to Yoshiyuki Suzuki, the Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co., which has the equivalent of $70.5 billion in assets.
“Yields are too low,” Suzuki said. “We don’t have to buy at the current level. The U.S. economy is showing signs of slowing, but it’s not so bad.”
The U.S. probably added 150,000 jobs in May, after a gain of 115,000 in April, based on the median estimate in a Bloomberg News survey of bank and securities companies before the Labor Department reports the figure June 1. The Conference Board index of consumer confidence rose to 69.5 in May from 69.2 in April, a report today will probably show, based on survey estimates.
The central bank plans to sell as much as $8.75 billion of Treasuries due from June 2014 to May 2015 today, according to the Fed Bank of New York’s website. The sales 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 down borrowing costs.
Comparatively Cheap
While Treasury 10-year note yields approach record lows, they’re cheap compared with AAA debt of other nations, helping trigger record demand at U.S. bond auctions even in a fourth year of $1 trillion budget deficits.
Yields on the benchmark security are 24 basis points higher than the average for comparable debt of nations from Germany to Australia, above the average of 12 basis points in the past year, data compiled by Bloomberg show. The gap between U.S. notes and German bunds widened to 37 basis points. As recently as November, bunds yielded 34 basis points more than Treasuries.
“Looking at the spectrum of opportunities in safe-haven assets, yields in 10-year Treasuries don’t really look that bad,” Gregory Whiteley, who manages investments in government debt at Los Angeles-based DoubleLine Capital LP, which has $35 billion in assets, said in a May 25 telephone interview.
Even after boosting the amount of marketable debt outstanding to more than $10 trillion from $4.34 trillion in mid-2007, the Treasury Department is attracting record demand at auctions. The cost to President Barack Obama’s administration of financing a fourth straight deficit has never been lower. The extra yield investors receive on Treasuries is an added benefit for investors seeking a haven from Europe’s sovereign debt turmoil.
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
