BLBG:Treasury Yield Is Three Basis Points From Low On Europe
Treasury 10-year yields were about four basis points from a record low amid speculation Europe’s financial crisis is spreading to the region’s strongest nations, underpinning demand for the perceived safety of U.S. debt.
The securities outperformed equivalent German bunds, with the difference in yield between them the least in two weeks, after Moody’s Investors Service cut the Aaa rated euro-region nation’s outlook yesterday, citing “rising uncertainty” over the crisis. The U.S. Treasury plans to sell $99 billion of notes this week starting with a two-year auction today.
“The U.S. is a real sovereign, while Germany is not, and now investors see the first crack which intensifies their concern about Germany’s contingent liabilities,” said Steven Major, the head of fixed-income research at HSBC Holdings Plc in London. “The sell-off in German bonds is likely to affect other safe-haven bonds, including Treasuries and gilts, but these bonds should outperform bunds on a relative basis.”
Ten-year Treasury yields were little changed at 1.44 percent as of 8:01 a.m. in New York, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 changed hands at 102 26/32. The rate declined yesterday to a record low 1.3960 percent.
Bunds fell, pushing 10-year yields up six basis points, or 0.06 percentage point, to 1.24 percent. The yield difference, or spread, between the German and U.S. debt narrowed to 20 basis points, the least on a closing basis since July 10.
Collective Support
Moody’s cited risks that Greece may leave the 17-nation currency bloc. It also cited the “increasing likelihood” of collective support for European countries such as Spain and Italy for yesterday’s changes to the outlook for Germany, along with those for the Netherlands and Luxembourg.
Spain’s bonds slid, pushing the 10-year yield to 7.63 percent and the five-year rate to 7.56 percent, both euro- lifetime highs. The nation’s borrowing costs rose at an auction of 3.05 billion euros ($3.69 billion) of bills. Spain’s government hasn’t ruled out leaving the euro as it considers options including an international bailout, El Confidencial reported, citing people close to Prime Minister Mariano Rajoy.
Demand for Treasuries also drove yields on U.S. five- and 30-year debt to record lows yesterday.
U.S. government securities returned 1.3 percent this month through yesterday, including reinvested interest, according to Bank of America Merrill Lynch indexes. German debt made 2.5 percent, the indexes showed, while the MSCI All-Country World Index of stocks dropped 2 percent in the period on a similar total return basis.
Bond Outlook
The 14-day relative strength index for the two-year U.S. yield was 33, after falling last week below 30, a level that some traders see as an indication of a possible reversal of direction. The two-year yield declined to 0.1933 percent yesterday, the least since September 2011.
The Federal Reserve plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of a program known as Operation Twist. The central bank is swapping short-term Treasuries in its holdings for longer maturities in a bid to send borrowing costs lower and stimulate the economy.
Fed Governor Sarah Bloom Raskin said yesterday U.S. policy makers will debate at a meeting next week whether to start another program to spur growth through large-scale Fed purchases of bonds.
Quantitative Easing
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 cap borrowing costs.
Ten-year U.S. yields will climb to 2.5 percent by Dec. 31, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets.
“Treasury yields are so much lower than what the U.S. economic situation suggests,” he said. “The housing market recovery is much stronger than expected.”
Sales of new homes may have risen to a 371,000 annual pace in June, the most since April 2010, according to economist forecasts in a Bloomberg News survey before figures from the Commerce Department tomorrow.
While U.S. economic growth is limited, it would be an “overreaction” to suggest it is headed for a recession, according to Bob Doll, who serves as an adviser to BlackRock Inc. (BLK), the world’s biggest money manager, which oversees about $3.6 trillion. Doll, who was the company’s former chief equity strategist for fundamental equities, commented yesterday on BlackRock’s website.
$99 Billion
The Treasury Department is selling $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year securities in two days.
Two-year notes yielded 0.215 percent in pre-auction trading, versus 0.313 percent the last time they were sold on June 26. Investors submitted orders for 3.62 times the amount of available debt last month. The average over for the past 10 sales is 3.72.
Direct bidders, non-primary dealers buying for their own accounts, purchased 7.9 percent of the securities. Indirect bidders, which include foreign central banks, bought 31.7 percent of the debt, the least since December.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
