Treasuries Rally on European Debt Turmoil, Slower U.S. Growth, Auction Bid
May 26 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., talks about the U.S. bond market and investment strategy. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
Treasury 10-year note yields fell to the lowest level this year on concern the International Monetary Fund may withhold aid for Greece next month and as a U.S. report showed the nation’s economic growth is losing momentum.
The refuge appeal of government debt helped boost demand at the $29 billion offering of seven-year notes to the highest level since the U.S. resumed selling the securities in 2009. Yesterday’s sale of five-year notes attracted the strongest demand in almost 17 years.
“The European situation has heated up again,” said Sean Murphy, a Treasury trader in New York at Societe Generale, one of the 20 primary dealers obliged to participate in U.S. debt offerings. “Guys are feeling you’re in for a pretty heated debate and better safe than sorry, so they’re piling into Treasuries and trying to ride it out.”
Benchmark 10-year note yields dropped seven basis points, or 0.07 percentage point, to 3.06 percent at 5 p.m. in New York, according Bloomberg Bond Trader Prices. The 3.125 percent security maturing in May 2021 gained 5/8, or $6.25 per $1,000 face amount, to 100 18/32.
The 10-year note yield touched 3.05, the lowest level since Dec. 7. The yield on the current seven-year note slid nine basis points to 2.36 percent, also the lowest since Dec. 7. A one- point increase in the 30-year bond pushed the yield down to 4.22 percent.
At today’s auction, the securities drew a yield of 2.429 percent, compared with the average forecast of 2.448 percent in a Bloomberg News survey of nine primary dealers.
Auction Demand
The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 3.24, the highest level since February 2009, the beginning of records on the data for this maturity.
Indirect bidders, an investor class that includes foreign central banks, purchased 47.6 percent of the notes, compared with 39.1 percent at the April 28 offering and an average of 49.6 percent for the past 10 sales.
Direct bidders, non-primary dealers that place their bids directly with the Treasury, purchased 13 percent of the securities, compared with an average of 7.7 percent at the past 10 offerings.
The offering is the last of three note auctions this week totaling $99 billion. The government’s $35 billion auction of five-year securities yesterday drew the highest bid-to-cover ratio since 1994, while demand at the sale of the same amount of two-year debt on May 24 was the strongest since January.
Gross on ‘Repression’
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors may be at a disadvantage for as long as 15 years as the U.S. keeps borrowing rates low to reduce its debt burden.
“It’s basically called financial repression,” Gross said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “We call it pocket picking.”
The difference between yields on U.S. 10-year notes and the annual rate of inflation, known as the real yield, turned negative this month for the first time since the end of 2008, when the Federal Reserve cut its target rate for overnight lending to zero to 0.25 percent.
Interest-rate futures indicated a 12 percent chance that the Fed will raise its target lending rate by December, down from a 24 percent probability a month ago. The central bank bought $6 billion of U.S. debt due from May 2015 to November 2016 today to sustain the economic recovery under a $600 billion program ending in June.
Treasuries rose earlier today after reports showed U.S. economic growth in the first quarter was slower than analysts forecast and initial jobless claims unexpectedly rose last week.
Slower U.S. Growth
America’s gross domestic product grew at 1.8 percent annual rate in the first quarter, Commerce Department figures showed. The gain was the same as estimated last month and compared with a 3.1 percent increase in the prior quarter. The median forecast of 82 economists in a Bloomberg News survey was for a revised 2.2 percent gain.
Initial jobless claims unexpectedly increased by 10,000 to 424,000 in the week ended May 21, the Labor Department reported. The median forecast of economists in a Bloomberg News survey was for a drop to 404,000.
Bonds extended gains after Luxembourg’s Jean-Claude Juncker, who leads a group of euro-area finance ministers, said the IMF may not release its portion of aid for Greece next month. A team of inspectors from the European Union, the IMF and the European Central Bank, known as the troika, is due to complete a review of Greece’s progress in meeting bailout terms next week.
Juncker on IMF
“There are specific IMF rules, and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Juncker said today at a conference in Luxembourg. “I don’t think that the troika will come to the conclusion that this is given,” he said.
Policy makers are seeking ways to restore investor confidence on concern Greece won’t be able to repay its debt after last year’s 110 billion euro ($155 billion) bailout.
A debt restructuring by Greece is “necessary and unavoidable,” and warnings by the ECB that it can’t be done “are dangerous,” the economist Nouriel Roubini told reporters at a seminar in Bucharest, Romania.
The Securities Industry and Financial Markets Association recommends that trading of Treasuries halt tomorrow in the U.S. at 2 p.m. New York time before Memorial Day. Financial markets there will be closed for the holiday May 30.
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
Rate this Page