BLBG:Treasuries Gain Before Spain Auction On Contagion Concern
Treasuries rose, sending 10-year yields down for the first time in three days, amid signs Europe’s deepening debt crisis is weighing on growth in the world’s largest economies.
Demand for the safety of U.S. government bonds was bolstered after a private report showed China’s manufacturing probably shrank for an eighth month. Data due today may show a gauge for the euro area’s industries slid to a three-year low and manufacturing in the Philadelphia region stagnated. Federal Reserve Chairman Ben S. Bernanke said yesterday policy makers are prepared to consider additional steps to aid the economy.
“More cautious views are getting prevalent on the global economic outlook,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees about $75 billion in Tokyo. “A slower-than-expected recovery in the world’s economy is a buying catalyst for bonds.”
Ten-year yields fell three basis points to 1.63 percent as of 7:03 a.m. in London after gaining eight basis points over the past two days. The 1.75 percent security due in May 2022 added 7/32, or $2.19 per $1,000 face amount, to 101 2/32, Bloomberg Bond Trader prices showed.
Japan’s 30-year bonds fell, with yields adding 2 1/2 basis points to 1.88 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The benchmark 10-year yield was unchanged at 0.82 percent. It slid to a nine-year low of 0.79 percent on June 4.
A purchasing managers’ index for China’s manufacturing was 48.1 this month on preliminary reading, HSBC Holdings Plc and Markit Economics said today, below the 50 level that indicates expansion. An eighth month of contraction would match the streak during the global financial crisis in 2008.
European Economy
A composite index for the euro region’s services and manufacturing output dropped to 45.5 this month, the lowest since June 2009 and below 50, the dividing line between expansion and contraction, according to the median estimate in a Bloomberg News survey of economists. A gauge of consumer sentiment in the currency bloc slid to a four-month low of minus 20 in June, a separate survey showed. The figures are due today.
Spain is scheduled to sell notes today maturing in 2014, 2015 and 2017 after becoming the fourth euro member earlier this month to seek a bailout. The country’s 10-year yields have retreated in the past two days after breaching the 7 percent level that prompted Greece, Ireland and Portugal to ask for international aid.
The Fed Bank of Philadelphia’s general economic index was probably at zero this month, the median estimate of economists showed before the figures are released today. The gauge fell to minus 5.8 in May, the lowest reading since September and signaling contraction.
Fed Policy
“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Bernanke said yesterday at a news conference in Washington after a two-day policy meeting. “Additional asset purchases would be among the things that we would certainly consider.”
The Fed yesterday decided to prolong through the end of the year its so-called Operation Twist program of selling shorter- term securities and buying the same amount of longer-term debt. The operation is designed to lower borrowing costs by extending the maturity of central-bank holdings.
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from 2008 through 2011.
While the central bank will probably refrain from carrying out more stimulus this year, there is an “increasing chance” that it will take additional steps in 2013, Fidelio Tata, head of U.S. interest-rate strategy in New York at Societe Generale SA, wrote in a research note today.
More Easing
“With the uncertainty about a possible QE3 being eliminated for the most part for 2012, implied volatility already took a turn lower,” Tata wrote. “We expect this to continue and interest rates to remain more range-bound in the months to come.”
Volatility in the Treasuries market dropped 19 percent in the past three days to reach 77.70 basis points yesterday, the lowest since May 31, Bank of America Merrill Lynch’s MOVE index showed. The index measures price swings based on options.
“Speculation for additional easing is likely to cause Treasuries to be bought initially,” said Mitsubishi UFJ’s Ishigane. “An actual announcement of easing would probably stoke expectations for an economic recovery, making Treasuries susceptible to selling.”
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
