Treasuries rose, pushing 10-year note yields toward the lowest level this year as global stocks fell on concern Europe’s sovereign-debt crisis is getting worse and Germany’s economic growth will lose momentum.
Yields on two-year notes had a sixth weekly drop after Bundesbank President Jens Weidmann said the European Central Bank may no longer be able to accept Greek sovereign debt as collateral in its refinancing operations if bond maturities are extended. Greece’s 10-year yields touched a record high as Fitch Ratings cut the nation’s ratings.
“There are still concerns out of Europe that is also helping the bid in the market,” said Paul Horrmann, a broker at Tradition Asiel Securities Inc. in New York. “The uncertainty never seems to stop.”
Yields on 10-year notes dropped three basis points, or 0.03 percentage point, to 3.15 percent at 5:22 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security maturing in May 2021 increased 7/32, or $2.19 per $1,000 face amount, to 99 26/32.
The 10-year note yields touched 3.09 percent on May 18, the lowest level since Dec. 7. The yields dropped that day to within a basis point of the 200-day moving average, then 3.08 percent. Two-year note yields slid one basis point to 0.51 percent today and fell two basis points for the week.
The comments from Weidmann, a member of the ECB Governing Council, added to signs of a rift between central bank policy makers and political leaders, who this week floated the idea of extending Greece’s debt repayment schedule as the nation struggles to meet the terms of last year’s 110 billion euro ($157 billion) rescue.
Weidmann’s colleagues Lorenzo Bini-Smaghi and Juergen Stark have also ruled out any restructuring of Greek debt.
Yields on 10-year Greek debt surged as much as 59 basis points to a record 16.59 percent. The 10-year bund yield decreased six basis points to 3.06 percent. It touched 3.05 percent, the lowest level since January.
Greece’s credit rating was cut three levels by Fitch, which said that even a voluntary restructuring of the country’s debt being considered by European Union policy makers would be considered a default.
Fitch lowered its rating to B+, four levels below investment grade, from BB+ and said that the country may face a further reduction in its creditworthiness.
Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialists were headed for defeat in elections on May 22 after a week of protests over his economic policies. The German Bundesbank said in a monthly bulletin that Europe’s largest economy will probably lose some growth momentum over the coming months after an “explosive” start to the year.
Drop in Stocks
The Standard & Poor’s 500 Index fell 0.8 percent. Crude oil for June delivery gained 1.1 percent to $99.49 a barrel after earlier dropping 2.5 percent to $95.99.
U.S. two-year note yields fell yesterday the most in almost a month as reports showing regional manufacturing and housing weakness reinforced speculation that the Federal Reserve will keep borrowing costs low.
Fed Chairman Ben S. Bernanke told reporters after last month’s policy meeting that he was unsure when stimulus would end after a $600 billion program of debt buying stops in June. The central bank purchased $6.9 billion of Treasuries due from November 2016 to April 2018 today.
“Keeping an underlying bid in the market is the combination of global sovereign risk out of Europe, the Fed that is still buying and a clearer picture of the economy that shows it is beginning to stumble,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.
Fed Rate Outlook
Fed funds futures indicate a 32 percent chance that the central bank will increase the target lending rate at its March 2012 meeting, compared with 50 percent odds a month ago. The central bank has held its target lending rate at zero to 0.25 percent since December 2008.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, dropped today to 2.27 percentage points after touching 2.26 percentage points on May 18, the narrowest since Feb. 17.
The Philadelphia Fed’s factory index slid to 3.9 this month from 18.5 in April, a report showed yesterday. Readings greater than zero signal expansion. Existing home sales fell 0.8 percent in April after a 3.5 percent increase in the previous month, the National Association of Realtors said.
Treasuries have returned 0.8 percent in May, following a 1.2 percent gain in April, according to Bank of America Merrill Lynch data.
The government plans to sell $35 billion of two-year notes, the same amount of five-year notes and $29 billion of seven-year notes next week in three sales starting May 24. The sizes are unchanged from the previous offerings.
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