BLBG:Treasuries Hold Gains On Europe Debt-Crisis Concern
Treasuries held onto gains from the past three days on speculation Spain’s bailout request for its banks will fail to keep Europe’s debt crisis from spreading.
Yields on 10-year notes maintained a slide from this month’s high as Italy’s borrowing costs climbed yesterday to the most since January after Spain asked for as much as 100 billion euros ($125 billion) of aid to rescue its lenders. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased its holdings of Treasuries in May. The U.S. will auction $66 billion of notes this week, starting with $32 billion of three-year securities today.
“We haven’t seen any ultimate solution to Europe’s debt crisis, and it’s possible that we won’t see any in the near future,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “The markets will likely remain risk averse, and the safety bid will continue to support Treasuries.”
The 10-year yield was little changed at 1.6 percent as of 1:56 p.m. in Tokyo, Bloomberg Bond Trader data show. The 1.75 percent security maturing in May 2022 changed hands at 101 11/32. The rate dropped five basis points yesterday, after touching 1.73 percent, matching the May 30 high.
The MSCI Asia Pacific Index of shares lost 0.7 percent after the Standard & Poor’s 500 Index fell 1.3 percent yesterday. Japan’s benchmark 10-year yield declined 1 1/2 basis points to 0.85 percent.
Greek Elections
Italy’s 10-year debt dropped yesterday with the yields jumping 26 basis points, the most since Dec. 8, to 6.03 percent, the highest since January. The nation on June 14 is scheduled to auction debt maturing in 2015, 2019 and 2020.
Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan.
Greece will hold elections on June 17 after the voting last month failed to produce a viable governing majority.
“All eyes now are on Greece and Italy, so the European crisis isn’t over,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Federal Reserve.
The three-year Treasuries being sold today yielded 0.365 percent in pre-auction trading, compared with 0.36 percent at the previous 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.
The government will sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds the following day.
Treasury Returns
U.S. government securities have gained 3.2 percent this quarter through yesterday, compared with a 1.9 percent return on the nation’s corporate debt, Bank of America Merrill Lynch data showed. The MSCI (MXAP) All Country World Index of equities handed investors a 9.3 percent loss including reinvested dividends over the same period, as concern Greece will exit the euro and signs the U.S. economic recovery is losing momentum prompted investors to shun riskier assets.
“Investors clearly have no intention of shifting their money into riskier assets like stocks and corporate bonds at the moment,” said CIBC’s Oh’e. “I expect the Treasury auctions this week to fare well.”
Pimco’s Gross raised the proportion of U.S. government and Treasury debt in the $260 billion Total Return Fund (PTTRX), bringing it up to 35 percent from 31 percent of its record asset holdings in April, Newport Beach, California-based Pimco said on its website. Holdings of mortgages dropped to 52 percent from 53 percent.
Operation Twist
The Federal Reserve plans to buy as much as $2.25 billion of Treasuries due from February 2036 to May 2042 today under its program known as Operation Twist to replace holdings of shorter- term securities with longer-term bonds, according to the Fed Bank of New York’s website.
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from December 2008 to June 2011 to cap borrowing costs and stimulate the economy.
Fed Bank of Atlanta President Dennis Lockhart said yesterday recent U.S. economic reports indicate the recovery may be losing momentum. Lockhart, who has a vote on the Federal Open Market Committee this year, reiterated his view that policy makers need to take further action to stimulate the economy if it becomes clear growth is slowing.
Boston Fed President Eric Rosengren said last week the Fed has “some flexibility” for more easing, while Fed Vice Chairman Janet Yellen said that “stalled” improvement in the labor market and weak financial conditions could call for more accommodation. The FOMC is scheduled to meet June 19-20.
“The market is pricing in some action from the Fed, and the focus has clearly shifted to QE,” Eric Green, head of rate strategy in New York at TD Securities Inc., wrote in a note to clients today, referring to quantitative easing.
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
