Treasuries Rise on European Debt Crisis; Gross Sees Low Rates

Treasuries rose for a second day as declines in Italian and Spanish bonds yesterday added to concern that Europe will struggle to contain a debt crisis that is threatening to slow global economic growth.

The Federal Reserve will keep interest rates low “for a number of years” to support the U.S. economy, said Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. The central bank is scheduled to buy as much as $5 billion of Treasuries due from 2017 to 2019 today as part of its policy of swapping holdings of shorter-term securities for longer maturities, according to its website.

“Concerns surrounding Europe are likely to keep yields from rising,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., part of Japan’s third-largest publicly traded bank. “Treasuries are being bought in a mild risk-off environment.”

U.S. 10-year yields fell three basis points, or 0.03 percentage point, to 2.03 percent as of 6:30 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 advanced 1/4, or $2.50 per $1,000 face amount to 99 3/4. The 30-year rate dropped three basis points to 3.08 percent, after sliding two basis points yesterday.

The MSCI Asia Pacific Index of shares declined 0.9 percent, snapping a two-day advance.

Japan’s 10-year note yielded 0.965 percent. The rate fell to 0.96 percent on Nov. 10, the lowest level in 12 months.

Italy’s borrowing costs surged to the highest level since 1997 at a note sale yesterday, while 10-year Spanish yields climbed 25 basis points to 6.11 percent.

‘No Country’s Immune’

U.S. Treasury Secretary Timothy F. Geithner said yesterday the European crisis has made the global economy worse and “no country’s immune to it,” in an interview with the British Broadcasting Corp.

The two-year swap spread widened to 48 basis points today, the most in 17 months, as investors sought the relative safety of government debt. In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed component and the yield on similar-maturity Treasuries.

Rates are “artificially suppressed,” Gross said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene from Pimco’s headquarters in Newport Beach, California. The Fed’s target for overnight loans between banks is a range of zero to 0.25 percent and the central bank has pledged to keep the rate low at least until the middle of 2013.

‘Artificial Yield’

“There’s a two-year period of time in which the Fed basically will stay at 25 basis points,” Gross said. “That basically produces a 10-year Treasury at 2 percent. That’s an artificial yield. It will probably be artificial for a number of years.”

Investors betting against Treasuries say yields are poised to rise because the U.S. economy is expanding even as Europe’s struggles.

Retail sales increased 0.3 percent last month, following a 1.1 percent gain in September, according to the median forecast of economists surveyed by Bloomberg News before the Commerce Department reports the figure today.

“It’s hard to justify this yield level,” said Kei Katayama, leader of the foreign fixed-income group at Daiwa SB Investments Ltd. in Tokyo, which has the equivalent of $64.3 billion in assets including Japan’s second-biggest bond fund. “More and more people will realize that the U.S. economy is growing. Yields will go up.”

China’s Treasury Holdings

Gao Xiqing, president of China Investment Corp., the country’s sovereign wealth fund, said global financial integration makes it harder to reduce holdings in certain markets. China cannot sell off sovereign debt of major economies without suffering losses, Gao said at a forum in Hong Kong today.

“If we dump these, we will see rapid devaluation of the assets,” he said. China holds $1.14 trillion of U.S. Treasuries, making it the biggest foreign investor in America’s debt.

Government reports today and tomorrow will show inflation, which erodes the value of a bond’s fixed payments, is cooling, economists said.

Producer prices fell 0.1 percent in October, after rising 0.8 percent in September, according to the median forecast in a Bloomberg News survey of banks and securities companies before the Labor Department reports the figure today.

U.S. Inflation Slowing

Consumer prices were unchanged in October, following a 0.3 percent gain the previous month, a separate poll indicated. Costs probably rose 3.7 percent from a year earlier, slowing from 3.9 percent in September. The Labor Department is scheduled to report the figures tomorrow.

Ten-year notes yield negative 1.87 percent after accounting for prices in the economy. The rate was negative 2.11 percent in October, the lowest since 1980.

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, has narrowed to 2.06 percentage points from this year’s high of 2.67 percentage points in April. The five-year average is 2.05 percentage points.

To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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