Treasuries Rise on Safety Demand Amid Europe Sovereign-Debt Crisis Concern
Treasuries advanced amid speculation European leaders will fail to find a solution to the region’s sovereign-debt crisis at a summit this week, stoking demand for the safest assets.
Benchmark 10-year note yields approached this year’s low before reports this week forecast to show U.S. housing market weakness. German government bonds rose, Italian and Spanish government securities tumbled and the euro slumped as debt turmoil spread to some of Europe’s largest economies.
“Treasury markets are very much looking at the wider picture in terms of the real structural problems that there are in the euro zone,” said Orlando Green, a fixed-income strategist at Credit Agricole SA in London. “The slow process of getting things sorted in Europe is a major stumbling block, and Treasuries are benefiting from the doubts about the recovery.”
Yields on 10-year notes fell three basis points, or 0.03 percentage point, to 2.88 percent at 7:33 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 increased 1/4, or $2.50 per $1,000 face amount, to 102 3/32.
Financial markets were closed in Japan for a holiday. U.S. 10-year yields finished last week 12 basis points lower at 2.91 percent compared with 2011’s low of 2.81 percent, set July 12.
European leaders will seek this week to break a deadlock on the debt crisis that is prompting warnings from the International Monetary Fund of contagion.
Euro Crisis
With European Central Bank President Jean-Claude Trichet reiterating opposition to any Greek debt restructuring, government chiefs plan to gather July 21 in Brussels to discuss “the financial stability of the euro area as a whole and the future financing of the Greek program,” European Union President Herman Van Rompuy said in a July 15 statement.
European bank stress tests failed last week to allay concern a nation will default and governments will struggle to bail out lenders. Regulators didn’t include a Greek default in the tests even though credit-default swaps indicate investors see an almost 90 percent chance of one.
As Greece struggled, yields on Italian and Spanish 10-year debt surged to euro-era records today. The euro slid 0.9 percent to $1.4033.
Demand for the safest securities helped send German yields down in the last two weeks and pushed yields on two-year debt five basis points lower to 1.17 percent today.
The extra yield that the German notes offer over same-maturity Treasuries narrowed to 81 basis points, the least in more than four months.
U.S. Housing
In the U.S., new-home construction rose 2.7 percent in June to a 575,000 annual rate, according to the median forecast of 59 economists before the Commerce Department’s report tomorrow. The rate of so-called housing starts has tumbled from 2.27 million in January 2006, the peak in the past decade.
Purchases of previously owned homes climbed 2.9 percent from May’s six-month low to a 4.95 million annual rate, economists in a Bloomberg News survey projected before the National Association of Realtors’ report July 20.
“The balance of risks still tips toward the bond bulls,” Nomura Holdings Inc. analysts led by George Goncalves, the New York-based head of rates strategy for the Americas, wrote in a July 15 report. “We remain committed to our ‘buy on dips’ view.”
Shorter maturities outperformed longer ones last week as Moody’s Investors Service and Standard & Poor’s put the U.S. debt rating on review for downgrade and lawmakers debated how to raise the $14.3 trillion debt ceiling to avoid a default.
Yield Spread
The ratings announcements helped widen the difference between five- and 30-year yields, Ajay Rajadhyaksha and Dean Maki, analysts at Barclays Plc in New York, wrote in a report July 15. The yield spread increased to 2.82 percentage points, the most this month.
Net purchases of long-term U.S. bonds, stocks and other assets by investors outside the nation rose to $40 billion in May from $30.6 billion, according to a Bloomberg News survey before the Treasury Department report today.
Mutual funds in the U.S. that focus on bonds have the highest percentage of assets in cash since 2008, which may temper any rise in yields as managers put that money to work.
Managers are sitting on about $243 billion of cash and short-term securities, or about 9.79 percent of assets, after investors plowed $90 billion into taxable bond funds this year, according to Morningstar Inc. and the Investment Company Institute in Washington. That’s up from 9.1 percent last year and above the average of 8.43 percent in the decade ended 2010.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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