Treasury Yields Fall to 2011 Low on Concern Europe’s Debt Crisis Worsening

Treasury notes rallied, pushing yields to this year’s lows, as U.S. stocks fell on concern Europe’s sovereign-debt crisis is getting worse.

Two-year notes rose for an 11th consecutive week in the longest rally since the 1980s on speculation Greece’s government will struggle to pass austerity measures needed to secure a bailout. U.S. securities extended their gains after breaking through a level where orders to sell may have been clustered.

“All eyes are on Europe,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies Group Inc., one of the 20 primary dealers that trade with the Federal Reserve. “We’ve seen a steady grind to lower yields without a significant pullback for several weeks now. Investors are just waiting for the storm to pass until there is some clarity.”

Yields on benchmark 10-year notes dropped five basis points, or 0.05 percentage point, to 2.87 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 13/32, or $4.05 per $1,000 face amount, to 102 7/32.

The 10-year note yields touched 2.85 percent, the lowest level since Dec. 1. They have fallen eight basis points this week in what would be a sixth straight drop.

U.S. 10-year notes rose further today after traders were able to push the yields below the 2.88 percent level where the securities had found resistance three times since June 16, according to Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., a primary dealer. Resistance is a level where sell orders may be clustered.

‘A Big Deal’

“We’ve decisively rallied through that level,” Prakash said. “That is a big deal. This rally can probably reach 2.75 percent.”

Yields on two-year notes, among the most sensitive to what the Fed does with its target rate for overnight lending because of their short maturity, dropped one basis point to 0.33 percent. They touched 0.32 percent, the lowest level since Nov. 4, when they fell to the all-time low of 0.3118 percent.

The yields have fallen four basis points this week in the longest stretch of decreases since September through November 1984, when the U.S. central bank had switched to cutting from raising interest rates.

Treasuries have returned 3.6 percent this quarter in the best performance since the second quarter of 2010, according to a Bank of America Merrill Lynch index.

Italian Bonds Drop

Italian 10-year bonds fell today, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since the euro was introduced in 1999 as Moody’s Investors Service said yesterday it may cut the ratings of Italian banks. The difference in yield widened to 2.15 percentage points as Italy’s 10-year yield advanced to 4.99 percent. Greece’s yield fell to 16.78 percent.

For Greece’s Prime Minister George Papandreou, the next hurdle is to shepherd 78 billion euros ($11 billion) of austerity measures through parliament. The program was endorsed yesterday by experts from the European Commission, the European Central Bank and the International Monetary Fund.

“We have agreed that there will be a new program for Greece,” German Chancellor Angela Merkel told reporters at an European Union summit in Brussels today. “This is an important decision that says once again we will do everything to stabilize the euro overall.”

The euro dropped for a third day against the dollar, falling 0.7 percent to $1.4160. The Standard & Poor’s 500 Index slid 1.1 percent. Crude oil for August delivery dropped 0.2 percent to $90.80 a barrel after falling below $90 yesterday for the first time since February.

Durable Goods

Bonds dropped briefly today after the Commerce Department reported that orders for goods meant to last at least three years rose 1.9 percent in May following a revised 2.7 percent decrease in the prior month. The median forecast of 69 economists was for a 1.5 percent gain.

The U.S. economy expanded at a 1.9 percent annual rate from in January through March after expanding at a 3.1 percent pace during the last three months of 2010, revised figures from the Commerce Department showed. The government reported in May a quarterly expansion of 1.8 percent.

“We finally got some relatively positive data for the economy,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors.

Fed Debt Buying

The Fed said after the June 21-22 policy meeting that it would maintain monetary economic stimulus after its $600 billion program of debt buying ends this month. The central bank purchased $4.6 billion of Treasuries maturing from April 2014 to May 2015 today.

Economic growth will pick up in the second half while remaining slow, and the Fed will maintain its record asset holdings for an “appropriate” period, according to Dallas Fed President Richard Fisher.

“It’s going to take quite some time to achieve a glide path that brings unemployment down significantly,” Fisher said today in a Bloomberg Television interview from Dallas. “It’s a slow recovery, and it’s going to continue to be slow.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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