BLBG:Treasury Yields Fall to Seven-Month Low on Greek Concern
Treasuries advanced, driving the 10- year yield to a seven-month low, as Greece’s leaders prepared for more talks on forming a government amid concern failure will force the nation from the euro area.
U.S. government bonds advanced for a second day after the party of Chancellor Angela Merkel was defeated in an election in Germany’s most-populous state. The Federal Reserve is scheduled to buy as much as $5 billion of U.S. bonds maturing in May 2018 to February 2020 today as part of its program to replace shorter-term notes with longer-dated debt. Treasury 10-year note futures climbed to a record.
“All markets are dominated by risk-off due to the uncertain outlook on Greece, and also following the state elections in Germany, which weakened the government,” said Niels From, chief analyst at Nordea Bank AB (NDA) in Copenhagen. “There’s a flight out of risky assets into non-risky assets, especially Treasuries.”
The benchmark 10-year yield slid six basis points, or 0.06 percentage point, to 1.78 percent at 7:21 a.m. New York time, after reaching 1.77 percent, the least since Oct. 4. The 1.75 percent note due May 2022 added 17/32, or $5.31 per $1,000 face amount, to 99 23/32, according to Bloomberg Bond Trader prices.
A test of the 10-year yield’s Sept. 23 record low of 1.67 percent is “definitely a possibility,” From said. Treasury 10- year futures climbed to as high as 133 18/32 today, the most since at least 1982.
Eight-Week Advance
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 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. 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.”
Swap Rates
Merkel’s Christian Democratic Union got the smallest vote share since World War II in the North Rhine-Westphalia ballot yesterday.
Royal Bank of Scotland Group Plc recommends betting on a gain in two-year U.S. swap rates as the intensifying debt crisis in Europe raises concern that banks will incur losses on their bond holdings, according to Yoshinori Shigemi, a strategist for non-yen debt at RBS Securities Japan Ltd. in Tokyo. 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.
A gauge of trader expectations for inflation slid before a Labor Department report tomorrow that economists estimate will show the U.S. consumer-price index rose 2.3 percent last month from a year earlier, down from 2.7 percent in March.
The yield gap between 10-year notes and Treasury Inflation Protected Securities, fell to as low as 2.12 percentage points today, the least since Feb. 2.
Slowing Inflation
The difference between two- and 30-year yields declined to the least in almost four months. U.S. two-year note yields were little changed at 0.26 percent, while 30-year rates slid six basis points to 2.95 percent. The spread narrowed to 269 basis points, the least since Jan. 18.
“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.”
The U.S. government will sell $13 billion of 10-year inflation-indexed bonds on May 17. The Treasury may auction $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.
The 30-year bond may find sales orders grouped at a yield of 2.93 percent, according to data compiled by Bloomberg.
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: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
