BLBG:Treasuries Advance as Europe’s Debt Crisis Boosts Demand for Safe Assets
Treasuries rose for the first time in three days as an increase in borrowing costs in France and Hungary added to concern the region’s debt crisis is spreading, boosting demand for the safest securities.
Longer-maturity bonds (USGG30YR) led gains as European stocks and the euro declined and the region’s bailout fund increased the additional yield it offers over the benchmark rate to sell three-year notes. Bill Gross, manager of the world’s biggest bond fund, advised investors to buy Treasuries as developed economies fail to reduce their debt levels and the risk from Europe’s debt crisis intensifies.
“Investors are fretting about the euro-land sovereign debt crisis again,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a brokerage. “Equities are drifting lower and you’re seeing a move away from risky assets into core bonds and 10-year Treasuries. Yields are still below the key 2 percent psychological level.”
The 10-year yield (USGG10YR) fell two basis points, or 0.02 percentage point, to 1.96 percent at 7:07 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note maturing in November 2021 rose 6/32, or $1.88 per $1,000 face amount, to 100 3/8. The 30-year yield dropped three basis points to 3 percent.
While 10-year yields have climbed from a record-low 1.67 percent reached on Sept. 23, demand for the safest assets helped Treasuries due in 10 years or more return 28 percent in the past 12 months, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies after accounting for currency changes.
Gross’s Advice
Gross, the founder of Pacific Investment Management Co. and manager of its $244 billion Total Return Bond Fund, recommended investors buy long-term inflation-indexed U.S. debt, high- quality corporate bonds, senior bank debt and municipal securities. He made the remarks yesterday in his monthly investment outlook published on the Newport Beach, California- based company’s website.
France sold 7.96 billion euros ($10.2 billion) of debt as borrowing costs rose in its first auction of the year as credit- rating companies threaten to cut its AAA ranking. The European Financial Stability Facility is selling 3 billion euros of February 2015 notes to yield 40 basis points more than the benchmark swap rate, a banker involved in the deal said. That compares with the six basis-point spread it paid to sell 5 billion euros of July 2016 bonds in January 2011.
Hungarian Sale
Hungary raised less than planned at a bill auction as yields soared on concern the International Monetary Fund and European Union won’t resume aid talks. They ended discussions last month as the government prepared legislation that threatened to undermine the independence of the central bank.
The euro dropped as low as 98.58 yen, the weakest since December 2000. The Stoxx Europe 600 Index slid 0.8 percent.
U.S. policy makers will keep borrowing costs near zero into 2014 to support the economy amid rising risks from Europe, a Fed survey of bond dealers shows.
The central bank is replacing $400 billion of shorter- maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and foster economic growth, in a plan it announced in September. The Fed is scheduled to sell as much as $1.5 billion of Treasury Inflation Protected Securities due from April 2012 to April 2014 today as part of the program, according to the New York Fed’s website.
Fed’s Pledge
The Fed’s pledge to keep down borrowing costs at least through mid-2013 makes securities maturing in one to three years the most attractive, according to Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich.
With economic data showing signs of stronger growth, “yields can easily go higher, so if you are exposed to longer maturities you can suffer,” he said. “You’re not losing if the crisis in Europe continues, and if the recovery continues, you also will not lose money.”
The difference in yield, or spread (USYC2Y10), between two-year and 10-year notes was 170 basis points today. It fell as low as 147 basis points on Oct. 4, from last year’s high of 291 basis points on Feb. 9. The 10-year average is 157 basis points.
Reports today are forecast to show claims for jobless benefits fell while services industries expanded, damping demand for the safest assets.
The 10-year Treasury yield has climbed eight basis points this year amid signs the U.S. economic recovery is gathering momentum. Treasuries fell yesterday after a government report showed factory orders increased in November by the most in four months, adding to evidence manufacturing is improving from India to the U.K. entering 2012.
Service Industries
The Institute for Supply Management’s index of non- manufacturing industries, which account for about 90 percent of the economy, rose to 53 from 52 in November, according to economists surveyed by Bloomberg before today’s data. Initial jobless claims fell to 375,000 last week from 381,000 in the previous period, a separate survey showed.
“We’re seeing a series of better U.S. data,” said Viola Stork, a fixed-income strategist at Helaba Landesbank Hessen- Thueringen in Frankfurt. “That should help push the yield up.”
The Treasury plans to announce today the amounts of three auctions of coupon-bearing securities set for next week.
The U.S. will sell $32 billion of three-year notes on Jan. 10, $21 billion of 10-year securities the following day, and $13 billion of 30-year bonds on Jan. 12, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance. The amounts would be the same as the previous auctions in December.
To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
