BLBG:Treasuries Drop As Spanish Bailout Call Saps Safey Demand
Treasuries pared gains on speculation a bailout of Spanish banks will provide only a short-term solution the region’s sovereign-debt crisis now in its third year.
U.S. government securities also tempered losses as Spanish and Italian bonds slid on bets the 100 billion euros ($126 billion) of aid for Spain’s banks won’t be enough to stop turmoil from spreading. Treasuries fell earlier as stocks advanced, luring investors to higher-yielding assets. The U.S. will auction $66 billion of notes this week, starting with $32 billion of three-year securities tomorrow.
“It seems like the relief was very short-lived indeed,” said Michael Leister, a rates strategist at DZ Bank AG in Frankfurt. “As usual the market is digging into the detail and doesn’t like the fact that many key issues are yet unknown. Treasuries have been dragged along by German bunds, which have also recovered from this morning’s lows.”
The benchmark 10-year yield was little changed at 1.64 percent at 7:47 a.m. New York time, according to Bloomberg Bond Trader prices. The yield earlier rose as much as nine basis points to 1.73 percent, the highest since May 30. The 1.75 percent note due in May 2022 traded at 101 1/32.
Spain requested the funds during a regional conference call on June 9, becoming the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago. Prime Minister Mariano Rajoy characterized the deal as a credit line for banks and an endorsement of his policies.
Spain’s 10-year bond yields advanced 24 basis points, or 0.24 percentage point, to 6.46 percent after declining as much as 20 basis points.
No Solution
The bailout is “a sticking plaster,” not a solution, Paul Donovan, a senior economist at UBS AG in London, wrote yesterday in a note to clients. This is a “disappointingly small step from the perspective of euro integration,” he said.
Treasuries have gained 3 percent this quarter through June 8, based on Bank of America Merrill Lynch data, as concern Greece will exit the euro and increasing unemployment in the U.S. prompted investors to seek the safety of U.S. debt.
The average yield on bonds issued by the Group of Seven nations has fallen to 1.12 percent from 3 percent in 2007, Bank of America Merrill Lynch index data show. Germany’s two-year note yield fell below zero for the first time on June 1, while Switzerland’s has been negative since April 24, meaning investors are paying for the right to lend the nation money.
‘Synchronized Slowdown’
“We may be in a synchronized slowdown” in global economic growth, Mohamed El-Erian, who as chief executive officer of Pacific Investment Management Co. oversees $1.77 trillion, said in a June 6 telephone interview. “We could stay here for a while.”
The three-year Treasuries being sold tomorrow yielded 0.38 percent in pre-auction trading, compared with 0.36 percent at the previous offering on May 8. Investors bid for 3.65 times the amount for sale last month, more than the average of 3.38 for the previous 10 auctions.
The U.S. will sell $21 billion of 10-year notes on June 13 and $13 billion of 30-year bonds the following day.
Two regional Fed bank presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, have said the central bank should be prepared to take action if the economy deteriorates further. Williams and Lockhart are scheduled to speak today.
Fed Speakers
Fed Chairman Ben S. Bernanke said last week the European debt crisis “poses significant risks to the U.S. financial system and economy and must be monitored closely.” Speaking to Congress’s Joint Economic Committee in Washington, he refrained from discussing steps the Fed might take to protect U.S. growth.
“Fed speakers today could add another dimension to how U.S. rates move along with the latest development in the euro crisis,” Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, wrote in a note to clients.
The Fed is replacing $400 billion of shorter-term Treasuries in its holdings with longer maturities by the end of this month to keeping borrowing costs down. The central bank plans to sell as much as $1.5 billion of Treasuries due from April 2013 to April 2015 today as part of the effort, according to the Fed Bank of New York’s website.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
