BLBG:Treasuries Fall On EU Plan For Loans To Spanish Banks
Treasuries fell, with 10-year yields rising the most in almost three weeks, after euro-area leaders relaxed terms on loans to Spanish banks as part of measures to contain the region’s debt crisis.
Longer-maturities led declines as European Union officials meeting in Brussels also eased conditions of possible help for Italy, reducing demand for the safest assets. Spanish and Italian bonds surged and the euro strengthened. Treasuries have still returned 3.4 percent this quarter, according to Bank of America Merrill Lynch indexes, as investors snapped up the securities as a haven from Europe’s financial turmoil.
“There’s a knee-jerk reaction to the EU announcement that’s bolstered risk sentiment,” said Marc Ostwald, a fixed- income strategist at Monument Securities Ltd. in London. “That’s weighing on Treasuries. Despite the selloff, 10-year yields remain in the range we’ve been in all month.”
The benchmark 10-year yield rose six basis points, or 0.06 percentage point, to 1.64 percent at 7:13 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 17/32, or $5.31 per $1,000 face amount, to 101. The yield climbed as much as eight basis points, the most since June 11.
The 30-year yield increased six basis points to 2.74 percent, widening the spread over two-year notes by six basis points to 243 basis points.
Italy, Spain
Europe’s leaders also discussed ways to reduce the risk premiums on Italian and Spanish bonds, which have stoked concern among investors and global policy makers that the region’s currency union threatened to break apart.
“We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. “We will keep all options open to do the interventions that need to be done to calm the situation.”
Spain’s 10-year bond yield dropped 35 basis points to 6.59 percent after falling as much as 55 basis points, the most since Dec. 5. Similar-maturity Italian yields slid 25 basis points to 5.94 percent.
The decline in Treasuries was tempered before U.S. reports that economists said will show personal spending stagnated and a gauge of business activity worsened.
U.S. household purchases were unchanged in May after rising 0.3 percent in April, according to a Bloomberg survey before today’s Commerce Department data. The Institute for Supply Management-Chicago Inc. will say its index of business activity fell to 52.3 in May, the lowest since September 2009, a separate survey showed. Readings greater than 50 signal growth.
‘Fragile’ Situation
Treasuries will keep rallying, said Hiromasa Nakamura, who helps oversee the equivalent of $41.5 billion as an investor at Mizuho Asset Management Co. in Tokyo. “Due to the fragile employment situation, consumer spending will slow.”
Ten-year note yields will fall to 1.2 percent by the end of the year Nakamura said, surpassing the record low of 1.44 percent reached on June 1.
Federal Reserve officials last week extended their effort to support the U.S. economy by replacing shorter maturities in their holdings with longer-term debt. The policy, known as Operation Twist, will put downward pressure on interest rates and ease conditions in financial markets, according to the central bank.
The Fed plans to purchase as much as $5.25 billion of Treasuries due from June 2018 to May 2020 today as part of the program, according to the Fed Bank of New York’s website.
Quantitative Easing
“It’s very important to focus on the personal consumption and expenditure,” Monument’s Ostwald said. “The Fed has made clear it’s worried that consumer spending is slowing. We’re still having the debate about what’s going to push the Fed into doing more quantitative easing.”
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said yesterday that economies and their financial markets take decades to normalize after the havoc of a fiscal crisis, making U.S. securities the safest bet.
An authentic debt crisis, which the world is experiencing, can only be cured by default or printing more money, Gross said in his monthly investment outlook on the Newport Beach, California-based company’s website. Treasuries are the cleanest “dirty shirts” for investors, he wrote.
“Don’t underweight Uncle Sam in a debt crisis,” he said. “Money seeking a safe haven will find it in America’s deep and liquid, almost Aaa rated, bond and equity markets.”
The U.S. has AAA debt rankings from Moody’s Investors Service and Fitch Ratings, the highest grades, and it is rated one step lower at AA+ by Standard & Poor’s.
Gross raised the proportion of U.S. government and Treasury debt in the $261 billion Total Return Fund (PTTRX) to 35 percent in May from 31 percent in April. Mortgages remained the largest holding at 52 percent, according to data on the website.
The increase in 10-year Treasury yields may stall as they approach 1.73 percent, the June 11 high and the 50-day moving average, according to data compiled by Bloomberg.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
