BLBG:Treasuries Drop As Spanish Bailout Call Saps Safey Demand
Treasuries fell after Spain became the fourth member of the euro bloc to seek a bailout since the start of the region’s debt crisis, damping refuge demand.
Benchmark 10-year yields touched a more than one-week high as Asian stocks rallied after Spain asked euro-region governments for as much as 100 billion euros ($126 billion) to rescue its banking system. The U.S. is scheduled to auction tomorrow $32 billion of three-year notes, followed by $21 billion of 10-year securities and $13 billion of 30-year bonds later in the week.
“The news on the Spanish bailout is triggering a relief rally in stocks,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third- largest listed bank. “The bias is for Treasuries to be sold to some extent in the risk-on environment.”
The 10-year yield rose seven basis points, or 0.07 percentage point, to 1.71 percent as of 6:01 a.m. in London, Bloomberg Bond Trader data show. The 1.75 percent security maturing in May 2022 sank 21/32, or $6.56 per $1,000 face amount, to 100 3/8. The rate earlier matched the May 30 high of 1.73 percent, following an 18 basis point increase last week, the most since the period ended March 16.
The MSCI Asia Pacific Index of shares climbed 1.7 percent today. Japan’s benchmark 10-year yield added 1 1/2 basis points to 0.86 percent.
Treasury Returns
Treasuries have gained 3 percent this quarter through June 8, based on Bank of America Merrill Lynch data, as mounting concern that Greece may exit the euro and increasing unemployment in the U.S. prompted investors to seek the safety of U.S. debt. The MSCI (MXAP) All Country World Index of equities handed investors a 9.1 percent loss including reinvested dividends over the same period.
“Uncertainty in Greece must be removed before we confirm whether bond yields are leaning toward an upward trend,” said Mizuho’s Asaoka. “Ten-year Treasury yield may struggle to rise above 1.8 percent.”
The 10-year rate will end this quarter at 1.81 percent, according to a Bloomberg News survey of financial companies, with the most recent forecasts given the heaviest weightings. The yield will reach 2.19 percent by year-end, the surveys show.
The three-year notes being sold tomorrow yielded 0.39 percent in pre-auction trading, compared with 0.36 percent at the prior offering on May 8. Investors bid for 3.65 times the amount for sale last month, more than the average of 3.38 for the previous 10 auctions.
Losses in U.S. debt may be limited before the policy setting Federal Open Market Committee meets June 19-20 to consider whether to add to its record easing after the economy created the fewest jobs in a year in May.
Fed Speakers
Two regional Fed bank presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, have said the central bank should be prepared to take action if the economy deteriorates further. Williams and Lockhart are scheduled to speak today.
Fed Chairman Ben S. Bernanke said last week the European debt crisis “poses significant risks to the U.S. financial system and economy and must be monitored closely.” Speaking to Congress’s Joint Economic Committee in Washington, he refrained from discussing steps the Fed might take to protect U.S. growth.
“Fed speakers today could add another dimension to how U.S. rates move along with the latest development in the euro crisis,” Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, wrote in a note dated today.
Yields indicate investors expect inflation to hold in check in the U.S., providing Bernanke room for further stimulus.
Inflation Expectations
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, was 2.14 percentage points, down from this year’s high of 2.45 percentage points in March. The average over the past decade is 2.15 percentage points.
Increases in U.S. consumer prices, excluding food and energy, slowed to 2.2 percent last month from a year earlier after rising 2.3 percent in April, a Bloomberg News survey forecasts before a Labor Department report on June 14.
The Fed is replacing $400 billion of shorter-term Treasuries in its holdings with longer maturities by the end of this month to keeping borrowing costs down. The central bank plans to sell as much as $1.5 billion of Treasuries due from April 2013 to April 2015 today as part of the effort, according to the Fed Bank of New York’s website.
To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
