BLBG:Treasuries Stay Lower As Leaders Discuss Europe Crisis
Treasuries stayed lower after falling yesterday as officials from Europe and the world’s biggest economies considered ways to stem the euro-bloc fiscal crisis, easing demand for the relative safety of U.S. debt.
Yields rose from record lows set last week after European Commission President Jose Barroso called for a stronger banking system. Group of Seven officials plan to discuss Europe’s financial status on a call today. The difference between 10-year yields in the interest-rate swap market and Treasuries narrowed to 21 basis points from the six-month high of 22 basis points yesterday, reflecting emerging demand for assets other than government securities.
“Officials are making progress on how to settle the European problem,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth- largest lender. “Clients don’t like current yield levels” on Treasuries, he said.
Benchmark 10-year notes yielded 1.53 percent as of 1:47 p.m. in Tokyo, according to Bloomberg Bond Trader data. The 1.75 percent note maturing in May 2022 changed hands at 102. The all- time low yield was 1.4387 percent set June 1.
Japan’s yield was 0.84 percent. It was as low as 0.79 percent yesterday, a level not seen since 2003.
Potential Breakup
Barroso said yesterday he supports a European banking union that includes strengthened supervision and deposit guarantees. Canadian Finance Minister Jim Flaherty said yesterday that officials from the Group of Seven are discussing the European debt crisis and will address it again in today’s call.
Greece has at least a one in three chance of leaving the euro bloc, Standard & Poor’s said yesterday. Ten-year yields climbed beyond 6 percent in Italy and approached 7 percent in Spain last week on concern the nations will have trouble paying their debts.
Treasuries are scheduled to close at 3 p.m. Tokyo time and will stay shut during London market hours in observance of Queen Elizabeth II’s Diamond Jubilee, according to the New York-based Securities Industry and Financial Markets Association. Trading in New York will take place as usual, the schedule shows.
Treasuries have surged 3.7 percent since the end of the first quarter through yesterday, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of stocks lost 12 percent including dividends.
Jobs Data
U.S. yields tumbled to records on June 1 after the Labor Department reported the economy added 69,000 jobs in May, less than half the figure projected by a Bloomberg News survey of economists.
“This kind of movement is very likely to continue,” said Kei Katayama, who invests in U.S. government debt in Tokyo at Daiwa SB Investments Ltd., which has the equivalent of $63.3 billion and is a unit of Japan’s second-largest brokerage. “The euro region is having a bad effect on the U.S. economy. It’s weaker than many people thought.”
The Institute for Supply Management’s U.S. non- manufacturing index, which covers almost 90 percent of the economy, probably held at 53.5 in May from April, according to the median forecast of economists surveyed by Bloomberg News before the report today.
Morgan Stanley, who along with JPMorgan, Goldman Sachs and Credit Suisse, are among the 21 primary dealers of U.S. government securities that trade with the Federal Reserve, said June 1 that the probability of the central bank adding more stimulus when its current effort ends this month is 80 percent, up from 50 percent.
Fed Operation
The central bank is replacing $400 billion of shorter-term debt in its holdings with longer maturities to keep borrowing costs down. The Fed plans to buy as much as $5.5 billion of Treasuries maturing from August 2020 to May 2022 today, according to the Fed Bank of New York’s website.
Fed Chairman Ben S. Bernanke is scheduled to speak June 7 on the U.S. economic outlook.
Yields indicate investors are cutting bets on inflation.
The difference between five- and 30-year Treasury rates narrowed to 1.88 percentage points yesterday, the least since October. Thirty-year bonds are more sensitive to costs in the economy because of their longer maturity.
The gap between rates on five-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 1.58 percentage points yesterday. It was the lowest level in five months. The average over the past decade is 1.93 percentage points.
No Coupons
Yields on 30-year principal-only bonds fell to 2.74 percent on June 1, the least based on Bloomberg data that start in 2002. The securities are among the most sensitive to costs in the economy because they don’t provide interest payments that mitigate losses as inflation erodes the value of the one-time payment.
Today’s low yields mean now isn’t the time to add to government bond holdings, Gavin Stacey, the Sydney-based chief interest-rate strategist at Barclays Capital, said today on Bloomberg Television’s “First Up” with Susan Li.
Ten-year rates will increase to 2.41 percent by year-end, according to a Bloomberg survey of banks and securities companies.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
