Treasuries Surge the Most Since Fed Announced Debt Buyback in March 2009

Treasuries surged, pushing yields down the most since the Federal Reserve said in March 2009 it would buy government debt, as concern that Europe’s debt crisis is worsening drove investors to the safest assets.

U.S. 10-year note yields tumbled as much as 28 basis points as European Central Bank President Jean-Claude Trichet resisted pressure from economists to consider buying government bonds to ease the Greek debt crisis. The euro slumped the most since the aftermath of the collapse of global credit markets in 2008, fueling a plunge in stocks and commodities.

“The market perception is ‘We don’t know what’s going on, let’s just go for safety,’” said Ray Remy, head of fixed income in New York at Daiwa Securities Group Inc., one of 18 primary dealers that trade with the Federal Reserve.

The benchmark 10-year note yield touched 3.26 percent, the lowest level since Dec. 2, before trading at 3.40 percent, down 14 basis points, at 4:58 p.m. in New York, according to BGCantor Market Data. A basis point is 0.01 percentage point.

The 30-year bond yield fell as much as 33 basis points, also the most since March 2009, and touched 4.06 percent, the lowest level since Oct. 8. It pared the drop to trade at 4.20 percent, down 18 basis points.

The Standard & Poor’s 500 Index plunged as much as 8.6 percent, the most since December 2008, before trimming its loss to 3.2 percent. The euro dropped below $1.26 for the first time since March 2009, and crude oil for June delivery fell as much as 6.7 percent to $74.58 a barrel in New York.

Crisis Going ‘Global’

The Greek debt crisis is going “global,” Pacific Investment Management Co.’s Mohamed El-Erian said.

“The transmission mechanisms for this latest round include disruptions in European interbank lines, a flight to quality and market illiquidity,” Newport Beach, California-based El- Erian wrote today in an e-mail.

More than $399.9 billion of Treasuries changed hands today as of 4:03 p.m., the most since June 5, 2009, according to ICAP Plc, the world’s largest inter-dealer broker. The daily average over that period is $224.4 billion.

Treasury 10-year note yields fell 54 basis points on March 18, 2009, the most since 1962, after the Fed surprised investors with plans to purchase as much as $300 billion in government debt to drive consumer borrowing costs lower and lift the economy from recession.

Trichet told reporters in Lisbon after an ECB meeting that policy makers “didn’t discuss the matter” of buying government bonds to ease the crisis.

‘Credible Consolidation’

“We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances,” Trichet said.

U.S. employers added 190,000 jobs in April, the most since March 2007, according to the median forecast of 84 economists in a Bloomberg News survey before the Labor Department reports the data tomorrow.

“The global risk story is still in play,” said Eric Lascelles, Toronto-based chief rates strategist and economist at Toronto Dominion Bank. “ It remains to be seen whether tomorrow’s data can buck the trend, but we expect the number to come in very strong, which may give Treasuries a reason to sell off.”

Initial claims for jobless benefits last week fell by 7,000 to 444,000, the lowest level in a month, Labor Department data today showed. The productivity of U.S. workers rose at a 3.6 percent annual rate in the first quarter, another Labor report showed. The median estimate in a Bloomberg survey was for a 2.6 percent gain.

Treasury Auctions

The U.S. said yesterday it will auction $78 billion in notes and bonds next week, the first reduction in sales of coupon-bearing securities since May 2007.

“The Treasury Department has evidently decided that the fiscal outlook has improved sufficiently to begin reducing the issuance of nominal coupon securities,” economists at Goldman Sachs Group Inc. including Ed McKelvey in New York wrote in a note to clients.

Europe’s fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the U.K. as the risk of contagion grows, Moody’s Investors Service said in a report today.

“Overall, Moody’s notes that each of these countries’ banking systems faces different challenges of different magnitudes, but warns that contagion risk could dilute these differences and impose very real, common threats on all of them,” the rating company said.

Economic fundamentals “tend to take a back seat to emotion” in times of crisis, Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients.

Employment Report

“If the employment report shows greater strength than what is widely expected, will the market respond by driving down Treasury prices with so much uncertainty overseas?” Giddis wrote. “Stay tuned.”

St. Louis Fed President James Bullard said the central bank can start selling some mortgage-backed securities before it increases its key interest rate.

“One way to get started with balance-sheet normalization is to very gradually start selling MBS securities,” Bullard said in response to reporters’ questions after a speech today in St. Louis. “We can do that before we feel we are ready to raise the federal funds rate.”

The Fed cut the benchmark interest rate to a range of zero to 0.25 percent in December 2008 and turned to purchases of Treasury, housing agency and mortgage-backed securities as the main tool for monetary policy.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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