BLBG:Treasury Yields Fall Toward 3-Month Low on Greek Concern
Treasuries advanced, pushing the 10- year yield toward a three-month low, as Greece’s leaders prepared for more talks on forming a government amid concern failure will force the Hellenic nation from the euro area.
U.S. government bonds advanced for a second day after the party of Germany’s Chancellor Angela Merkel was defeated in the nation’s most-populous state in an election seen as a revolt against bailing out Greece. The Federal Reserve is scheduled to buy as much as $5 billion of U.S. bonds maturing in May 2018 today to February 2020 as part of its program to replace shorter-term notes with longer-term debt.
“Our core view is that Greece will exit from the euro bloc, and we see a higher chance for its occurrence between the third quarter and the year-end,” said Yoshinori Shigemi, a strategist for non-yen debt at RBS Securities Japan Ltd. in Tokyo, a unit of Royal Bank of Scotland Group Plc. “When markets fully price in such a scenario, Treasuries yields may fall a bit more” on demand for safer assets, he said.
The benchmark 10-year yield slid four basis points, or 0.04 percentage point, to 1.80 percent at 8:53 a.m. London time. The rate reached 1.79 percent on May 9, the least since Jan. 31. The 1.75 percent note due May 2022 added 11/32, or $3.44 per $1,000 face amount, to 99 17/32, according to Bloomberg Bond Trader prices.
Treasury 10-year note futures climbed to 133 10/32, the most since Bloomberg began collecting the data in 1982.
Ten-year notes completed an eighth weekly advance on May 11, the longest stretch since the nine weeks ended in October 1998. That series of gains had been driven by demand for safety after Russia said in August of 1998 it would allow its currency to depreciate and delay some debt payments.
Greek Politics
Greek President Karolos Papoulias will meet party leaders today, state-run NET TV said, without citing anyone. Alexis Tsipras, who heads the largest anti-bailout party, Syriza, and rejected a unity government, won’t attend the meeting, NET TV reported. Greece may face new national elections unless a government is formed following the inconclusive voting on May 6.
The outcome of the Greek election “has increased the likelihood of a further, disorderly Greek default and ultimately of Greece’s departure from the euro area,” Nondas Nicolaides, a senior analyst at Moody’s Investors Service, wrote in a Weekly Credit Outlook report today. “A Greek exit from the euro would be a severe credit negative for Greek banks.”
Merkel’s Christian Democratic Union got the smallest vote share since World War II in the North Rhine-Westphalia ballot yesterday, according to the latest ZDF television projections.
Swap Rates
RBS recommends betting on a gain in two-year U.S. swap rates, according to Shigemi, as the intensifying debt crisis in Europe raises concern that banks will incur losses on their bond holdings. The gap between the two-year swap rate and the yield on similar-maturity U.S. debt may widen to 50 basis points, he said, from 36 basis points today.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt, slid to 2.14 percentage points today, the least since Feb. 2 for the so- called breakeven rate.
The U.S. government will sell $13 billion of 10-year inflation-indexed bonds on May 17 when it announces the sizes of debt auctions for next week. The Treasury may sell $35 billion of two-year notes on May 22, the same amount of five-year debt the following day and $29 billion of seven-year securities on May 24, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.
Slowing Inflation
The U.S. consumer-price index rose 2.3 percent last month from a year earlier, down from 2.7 percent in March, according to economist estimates taken before the Labor Department releases the figure tomorrow. It climbed as much as 3.9 percent in September last year.
“Because inflation hasn’t accelerated that much, there are fewer negative factors for the U.S. economy,” said Hitoshi Asaoka, a Tokyo-based senior strategist at Mizuho Trust & Banking Co., a unit of Japan’s third-largest bank by market value. “Faster inflation reduced consumers’ purchasing power last year, which contributed to a temporary slowdown in the U.S. economy.”
Treasuries have returned 0.7 percent this year, according to an index compiled by Bank of America Merrill Lynch. The Standard & Poor’s 500 Index (SPX) of U.S. shares has handed investors an 8.4 percent gain, including reinvested dividends, during the period.
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
