Treasuries Yield Curve Near Least This Year as Demand for Safety Decreases

The difference between two- and 10- year Treasury yields stayed near the least this year as signs the economic recovery is gaining pace sapped demand for shorter- dated securities.

Two-year notes are also lagging behind their longer-term counterparts as European officials arrange a rescue package to prevent Greece’s debt crisis from spreading, providing further reason for investors to trim holdings of the safest securities. Ten-year Treasury yields extended yesterday’s 4 basis-point advance before a report that economists said will show home sales gained.

“It’s back to fundamentals as far as U.S. Treasuries are concerned,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “With the situation in Greece approaching a resolution, attention turns to economic data, which will give further indications of the strength of the economic recovery.”

The spread between two- and 10-year rates, the so-called yield curve, was at 2.71 percentage points as of 8:50 a.m. in London, after narrowing to 2.67 percentage points earlier. It was 2.65 percentage points on March 24, the least since Dec. 10, according to data compiled by Bloomberg.

The benchmark 10-year Treasury yield climbed 1 basis point to 3.69 percent, according to BGCantor Market data. The 3.625 percent security due February 2020 fell 2/32, or 63 cents per $1,000 face amount, to 99 14/32. Trading was closed in Japan for a holiday.

An index of pending home resales climbed 5 percent in March following an 8.2 percent jump a month earlier, according to the median forecast in a Bloomberg News survey of economists before the National Association of Realtors reports the figure.

Banks Seeking Yield

Ten-year yields have fallen about a quarter percentage point in the past month, versus a decline of 11 basis points for two-year rates. Two-year notes are seen as a safer bet because of their short maturity, while longer-term Treasuries are more influenced by inflation.

Banks seeking yield increased demand at the Treasury’s auctions of 10- and 30-year securities in March. Thirty-year bonds offer 4.54 percent.

Lenders purchased a record $2.562 billion, or 12 percent, of the 10-year notes sold on March 10, and $3.146 billion, or 24 percent, of the 30-year bonds offered the next day, government data show. Banks typically made up less than 1 percent of the demand for longer maturity debt.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 2.40 percentage points from this year’s high of 2.49 percentage points in January. The five- year average is 2.15 percentage points.

Auction Size

The Treasury is scheduled to sell $80 billion of notes and bonds next week, according to the median forecasts in a Bloomberg News survey of 17 of the 18 primary dealers that trade with the Federal Reserve. The sales will be held over three days starting May 11. The government plans to announce the amounts tomorrow.

Ten-year yields will rise as the economy quickens, said Roger Bridges, who oversees the equivalent of $11.1 billion as head of bonds at Tyndall Investment Management Ltd. in Sydney.

“Risk premiums on long-term rates are too low,” Bridges said. “The data seem to be verging on the stronger side.” He trimmed holdings at the end of last year, he said.

The 10-year rate will advance to 4.13 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Global Recovery

The yen fell to an eight-month low against the dollar as signs the global economic recovery is gaining momentum damped demand for Japan’s currency as a refuge. The greenback climbed to 94.99 yen, the most since Aug. 24.

Australia’s central bank raised its benchmark interest rate to 4.5 percent from 4.25 percent to quell inflation as economic growth accelerates.

U.S. yields probably won’t rise while there are concerns about the credit quality of some European debt, Morgan Stanley said in an April 30 report. Euro-region finance ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece after investors’ concern that governments will default on their debt sparked a rout in Portuguese and Spanish bonds last week and sent stock markets tumbling.

‘Sovereign Risk’

“Sovereign risk events in peripheral Europe continue to prevent U.S. rates from moving higher even as economic conditions improved,” Jim Caron, head interest rate strategy in New York, and Laurence Mutkin, head of European rate strategy in London, wrote in the note.

They are sticking to their view that 10-year rates will climb to 4.5 percent in coming months, the report said. Morgan Stanley is one of the primary dealers.

Treasuries fell yesterday after European officials announced the Greek rescue package and reports showed the U.S. economic recovery is broadening.

Personal spending in the U.S. rose 0.6 percent in March after increasing a revised 0.5 percent in the prior month, the Commerce Department said. The Institute for Supply Management’s index of manufacturing rose to 60.4 last month, the highest level since June 2004.

Treasury Secretary Timothy Geithner will testify before the Senate Finance Committee at 10 a.m. Washington time.

To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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