BLBG:Treasury Yields Drop To Records On European Debt Crisis
Treasuries climbed, with five-, 10- and 30-year yields sliding to records, as concern mounted that Europe’s debt crisis is worsening and before reports this week forecast to show U.S. growth cooled.
Ten-year U.K. and Finnish rates fell to the lowest on record, as did German two-year note yields. Japan’s five-year yield slid to the least since 2003. Treasuries made 1.2 percent this month after a 0.4 percent loss in June, Bank of America Corp. data show. Bill Gross, who runs the world’s top bond fund at Pacific Investment Management Co., wrote on Twitter that real assets are a “better bet” amid negative real interest rates.
“There is no definitive downside limit to yields as long as the euro debt crisis and the global-growth outlook deteriorate,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Treasuries, like German bunds and British gilts, will enjoy strong demand as long as investors’ top priorities are safety and liquidity.”
The benchmark 10-year yield fell five basis points, or 0.05 percentage point, to 1.40 percent at 7:54 a.m. in New York. The 1.75 percent note due in May 2022 rose 16/32, or $5 per $1,000 face amount, to 103 5/32. The yield fell to as low as 1.3960 percent, with the five-year rate dropping to 0.5411 percent and the 30-year yield sliding to 2.4752 percent.
The 10-year record compares with an average of 3.76 percent over the past 10 years, according to data compiled by Bloomberg.
Spain, Greece
German bunds advanced after El Pais reported, without citing anyone, that six Spanish regions may ask for aid from the central government, and speculation grew that Greece will miss its bailout targets. German government bonds handed investors a 2.6 percent return this month, according to Bank of America Merrill Lynch indexes.
The U.S. economy grew at an annualized 1.4 percent in the second quarter, according to a Bloomberg News survey before the Commerce Department report on July 27. That would be the slowest pace since the period ended June 2011 and compares with a 1.9 percent rate in the first quarter of this year.
Investors may be able to maintain purchasing power with real assets, Pimco’s Gross wrote on Twitter. Real assets include inflation-linked bonds, commodities, real estate or some combination of those assets, according to the company’s website. Gross’s $263 billion Total Return Fund had 52 percent of its assets in mortgage-related bonds and 35 percent in Treasuries as of June 30, the website showed.
The cost of living in the U.S. rose 1.7 percent in June from a year earlier, according to a July 17 report. The difference between the consumer-price rate and the 10-year Treasury yield, the so-called real yield, was minus 29 basis points at the note’s current level.
Fed Meeting
The Federal Open Market Committee next meets on July 31 and Aug. 1. While policy makers refrained from introducing a third round of asset purchases at their meeting last month, central bank Chairman Ben S. Bernanke indicated in two days of testimony in Washington last week that it’s an option.
The Federal Reserve plans to buy as much as $5 billion of Treasuries due from July 2018 to May 2020 today as part of a program known as Operation Twist, in which it swaps short-term bonds in its holdings for longer maturities to push long-term borrowing costs lower.
The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to stimulate the economy. The benchmark rate has been in a range between zero and 0.25 percent since December 2008.
The world’s biggest fixed-income investors are increasing holdings of corporate debt as a haven from the negative real yields on government debt from the U.S., the U.K. and Germany.
BlackRock, Glenmede
BlackRock Inc. (BLK), Glenmede Corp. and at least four other firms that collectively manage in excess of $4 trillion are putting more of their money into the bonds of companies, contributing to a record rally.
Treasuries are “expensive,” according to Roger Bridges, who oversees $15.3 billion as head of fixed income at Tyndall Investment Management Ltd. in Sydney.
Valuation measures show U.S. sovereign securities are at the most costly levels ever. The term premium, a model created by economists at the Fed, surpassed negative 1 percent, the most expensive level ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Ten-year yields will climb to 1.9 percent by Dec. 31, according to the median estimate of economists in a Bloomberg News survey this month.
European Yields
Concern about Europe “and uncertainty about the U.S. economy is picking up,” Bridges said. “It’s obviously going to keep Treasuries fairly well-bid.”
Ten-year gilt yields fell to an all-time low 1.407 percent, with Finnish 10-year yields dropping to 1.368 percent, the least since Bloomberg began compiling the nation’s data in 1996. German two-year note yields declined to minus 0.08 percent, and five-year Japanese yields fell to 0.17 percent, the least since June 2003.
Figures from London-based Markit Economics scheduled for tomorrow will show a composite index based on a survey of purchasing managers in manufacturing and services in the euro area was unchanged at 46.4 this month from June, according to economists in a Bloomberg survey. A reading below 50 indicates contraction.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
