BLBG:Treasuries Rise as Global Concern Boosts Safety Bid
Treasuries rose for a third day in the longest winning streak in almost a month after reports showed euro-region output contracted and China’s manufacturing weakened, boosting refuge demand.
Yields on 10-year notes fell to the lowest level in a week on concern global growth is slowing. Citigroup Inc.’s chief economist, Willem Buiter, said Spain has never been so close to default. U.S. economic prospects pushed yields earlier this week to the highest level since October.
“Treasuries are caught in the middle of two forces: pressure from solid U.S. data and support from non-domestic factors,” said Vincent Chaigneau, global head of interest-rate strategy at Societe Generale SA in Paris. “The market is concerned that Spain will find it hard to achieve its budget target, and also we saw the poor China PMI. Those factors underpin flight to quality and give some support to Treasuries.”
Yields on 10-year notes fell four basis points, or 0.04 percentage point, to 2.26 percent at 6:50 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2 percent securities maturing in February 2022 rose 10/32, or $3.13 per $1,000 face amount, to 97 22/32.
The 10-year note yields reached 2.25 percent, the lowest level since March 15. Chaigneau said he expects the advance in yields to resume and he may become a buyer of 10-year Treasuries if yields increase to 2.50 percent to 2.75 percent.
Break-Even Rate
The difference in yield between 10-year Treasury Inflation Protected Securities and nominal notes, known as the break-even rate, shrank for a second day before today’s $13 billion government sale of the inflation-indexed debt.
The spread decreased one basis point to 2.39 percentage points after climbing to a seven-month high of 2.45 percentage points on March 20. The figure indicates the annual rise in consumer prices investors expect over the next 10 years. The average over the past year is 2.19 percentage points.
“The recent rise in yields should help this supply be absorbed relatively easily,” Barclays Capital’s Alan James, head of inflation-linked bond research in London, wrote in a report. “Over the medium term, we see risks skewed towards further break-even widening, particularly if there is further nominal cheapening.”
Note Auctions
The Treasury Department is scheduled to announce today the size of three note sales scheduled for next week. The U.S. will probably auction $35 billion of two-year securities on March 27, the same amount of five-year debt on the following day and $29 billion of seven-year notes on March 29, 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 last time the government sold the securities in February.
The Fed will purchase as much as $2.25 billion of securities due from August 2022 to February 2031 today as part of its plan to buy $400 billion in longer-term maturities by the end of June to boost the economy.
Treasuries advanced after London-based Markit Economics said in an initial estimate today that a euro-area composite index based on a survey of purchasing managers in services and manufacturing dropped to 48.7 this month from 49.3 in February. The median forecast in a Bloomberg News survey of 21 economists was for a gain to 49.6. A reading below 50 shows contraction.
China’s Manufacturing
The preliminary index of China manufacturing from HSBC Holdings Plc and Markit Economics fell to 48.1 for March from 49.6 in the previous month.
German 10-year bund yields decreased five basis points to 1.93 percent. Spain’s 10-year yield rose nine basis points to 5.49 percent. The Stoxx Europe 600 Index retreated 1.2 percent.
“Spain is the key country about which I’m most worried,” Citigroup’s Buiter, a former Bank of England policy maker, said in a radio interview yesterday on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. It “is now at greater risk of sovereign restructuring than ever before.”
While 10-year note yields climbed on March 20 to 2.40 percent, the highest level since Oct. 28, they’re still less than the average of 3.87 percent over the past decade. The yields will increase to 2.54 percent by year-end, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.
Investors have been re-evaluating the prospects of further U.S. monetary stimulus since Federal Reserve policy makers raised their assessment of the economy on March 13.
“From a longer-term perspective, there seems to be only one way for bond yields and that is up,” Joost van Leenders, an Amsterdam-based strategist at BNP Paribas Investment Partners, wrote in a note to investors. “That said, we do not foresee particularly steep gains. We have to keep in mind that bounces in yields are not uncommon.”
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
