BLBG:Treasuries Rise As George Soros Warns Euro Is At Risk
Treasuries rose, snapping a decline from last week, after billionaire investor George Soros warned the euro may dissolve if European Union leaders fail to curb the region’s debt crisis at a two-day summit starting June 28.
Europe should start a fund to buy bonds from Italy and Spain in return for budget cuts in the nations, Soros said yesterday. The nations are both scheduled to sell securities tomorrow. As European governments try to find ways to pay their debts, demand for the safest assets helped Treasuries beat all other U.S. fixed-income securities for the first time in three quarters.
“The ideal thing will be for EU leaders to lay out a grand plan for fiscal union, but the suspicion is that they will again fall short of that,” said Peter Jolly, the head of market research at National Australia Bank Ltd. (NAB), the nation’s largest lender by assets. “That’s going to keep Treasury yields low.”
The U.S. 10-year yield declined two basis points, or 0.02 percentage point, to 1.66 percent as of 7:10 a.m. in London, Bloomberg Bond Trader data show. The 1.75 percent note due in May 2022 advanced 5/32, or $1.56 per $1,000 face amount, to 100 27/32. The rate increased 10 basis points last week.
Treasury 10-year notes will yield 2 percent at year-end, Sydney-based Jolly said, versus the average of 3.78 percent over the past decade.
Japan’s 10-year rate was unchanged at 0.825 percent. It was as low as 0.79 percent on June 4, a level not seen since 2003.
Comparative Returns
European leaders are running out of time to show investors they will do what’s necessary to save their currency, according to Soros.
“There is a disagreement on the fiscal side,” he said in an interview in London with Bloomberg Television’s Francine Lacqua. “Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco. That could actually be fatal.”
Italy plans to sell inflation-linked securities maturing in 2016 and 2026 tomorrow as well as 3 billion euros ($3.76 billion) of zero-coupon bonds. Spain will auction three- and six-month bills. The U.S. is scheduled to sell $99 billion of notes over three days starting tomorrow.
U.S. government debt has gained 2.9 percent since March, while corporate bonds returned 1.9 percent, mortgages rose 1 percent and municipal bonds increased 1.8 percent, according to Bank of America Merrill Lynch index data.
Treasuries have advanced 1.6 percent this year, versus 9.8 percent for all of 2011.
Twist Extension
The returns show that even after the Federal Reserve kept the economy growing for 11 quarters by buying $2.3 trillion of assets and swapping short-term debt from its holdings into longer-maturity securities, bond investors are betting the economy will have trouble picking up.
Fed officials led by Chairman Ben S. Bernanke last week extended their program to replace $400 billion of shorter maturities with longer-term debt. The measure, known as Operation Twist, was expanded by $267 billion through the end of 2012. Policy makers cut their estimate for 2012 growth to a range of 1.9 percent to 2.4 percent from 2.4 percent to 2.9 percent in April.
“There are not enough points of light and promise out there to get you to say ‘I’m going to go for that risk-based asset,’” said Mitchell Stapley, chief fixed-income officer at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees $15 billion, in a June 22 telephone interview. “You’re going to sleep less badly by buying a U.S. Treasury security.”
Haven Shortage
Government bonds losing their risk-free status are depriving investors of ways to preserve wealth, according to the Bank for International Settlements.
There is “a major shortage of safe assets in the global financial system,” the BIS said in a report yesterday.
The difference between yields on 10- and 30-year U.S. Treasuries narrowed last week after the Fed extended Operation Twist. The gap shrank to 1.09 percentage points from 1.11 percentage points on June 15. The spread has narrowed from this year’s high of 1.22 percentage points in February, known as a flattening of the yield curve.
“We believe it is not yet fully reflecting the demands shock from a six-month extension of Operation Twist, implying that the curve has room to flatten,” Anshul Pradhan and Vivek Shukla, analysts at Barclays Plc in New York, wrote in their fixed-income outlook report for today. Barclays is one of the 21 primary dealers that trade directly with the Fed.
The three-month London interbank offered rate at which banks say it would cost to borrow dollars from one another fell last week after the Fed said its extension to Operation Twist will not only put downward pressure on interest rates but will also help ease broader financial conditions.
Three-month Libor dropped to a seven-month low of 0.46 percent.
The difference between Libor and the overnight indexed swap rate, a measure of banks’ willingness to lend, narrowed to 28 basis points, the least since September.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
