Treasury Yields Touch 10-Week Low on Europe Concern, Kim Jong Il’s Death

Treasury 10-year note yields touched a more than two-month low as the prospect of credit downgrades of France and Spain along with the death of North Korean leader Kim Jong Il boosted demand for U.S. government debt as a haven.

Fitch Ratings last week lowered France’s credit outlook and said it may cut Spain’s grade as the nations prepare for bill sales this week. U.S. bonds held onto gains from last week as Asian stocks extended losses after North Korean state television confirmed that Kim had died. The Treasury begins auctions of two-, five- and seven-year notes today.

“Kim Jong Il’s death added to uncertainty in the markets, which have already been risk averse because of the European debt crisis,” said Masaru Hamasaki, Tokyo-based chief strategist at Toyota Asset Management Co., which looks after the equivalent of $24 billion, including Japanese and global government bonds. “Investors are flocking to the safety of Treasuries.”

The yield on the 10-year note was little changed at 1.84 percent at 6:45 a.m. in London from the close in New York last week, according to Bloomberg Bond Trader prices. The 2 percent security due November 2021 changed hands at 101 14/32. The rate earlier touched 1.83 percent, matching the lowest level since Oct. 5.

The benchmark 10-year yield declined 145 basis points, or 1.45 percentage points, this year and fell to a record low of 1.67 percent on Sept. 23.

The MSCI (MXAP) Asia Pacific Index of shares dropped as much as 2.5 percent today after the official Korean Central News Agency said Kim, 70, died on Dec. 17 of exhaustion brought on by a sudden illness while on a domestic train trip.

France is scheduled to sell as much as 7 billion euros ($9.1 billion) of bills today. Spain will auction government securities tomorrow maturing in three and six months.

Fitch Ratings

Fitch reduced its outlook for France to negative from stable on Dec. 16, saying the country is more exposed to the region’s debt crisis than other top-rated euro-zone countries because of its budget deficit and government debt burden. The ratings company separately placed other European nations, including Spain and Italy, on a review for a downgrade.

Moody’s cut Belgium’s credit rating two levels to Aa3 last week. The firm said the European summit this month offered few new measures and didn’t diminish the risk of rating revisions. Standard & Poor’s said on Dec. 5 it expected to conclude a review of euro-area sovereign ratings “as soon as possible” after the Dec. 8-9 summit.

Euro Finance Ministers

Finance ministers in the euro region will hold a conference call today to discuss 200 billion euros in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at the summit, according to two people familiar with the planning.

“I’m not expecting any material sell-off on Treasuries any time soon,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker. “All hinges on Europe at the moment. We need risk appetite to come back into the market” to see an increase in yields.

U.S. two-year interest-rate swap spreads, a measure of stress in credit markets, were at 49 basis points today, hovering around the widest level since Nov. 30, according to data compiled by Bloomberg.

The gap between what banks and the Treasury pay to borrow money for three months, known as the TED spread, reached 57 basis points Dec. 16, the highest level since May 2009.

Bond Returns

Treasuries have gained 1.1 percent in the month through Dec. 16, based on Bank of America Merrill Lynch data. German bunds gained 2.7 percent and Japanese bonds increased 0.6 percent, the indexes show.

U.S. debt due in 10 years or more has returned 30 percent this year, the most among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies after accounting for currency changes.

Japan’s benchmark 10-year yields slid one basis point to 0.97 percent today, after earlier falling to 0.965 percent, the lowest level since Nov. 24.

The Treasury will offer $35 billion of two-year notes today, and auction the same amount of five-year debt tomorrow, and $29 billion of seven-year securities on Dec. 21. The amounts were unchanged from the last offerings of the maturities in November.

Fed Asset Purchases

The Federal Reserve is scheduled to buy as much as $5 billion of Treasuries due from 2017 and 2019 today as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs.

Gains in U.S. debt were limited before data this week that may add to evidence that the world’s largest economy is gaining momentum.

Housing starts in the U.S. increased 1.1 percent last month from October when they declined 0.3 percent, according to economist estimates in a Bloomberg News survey before the Commerce Department releases the data tomorrow. Consumer spending rose for a fifth month in November, adding 0.3 percent, another survey of economists showed before the government report due Dec. 23.

U.S. gross domestic product will expand 2.19 percent next year, compared with 1.55 percent for the Group of 10 nations, Bloomberg surveys of economists show.

“U.S. data have been showing the economy is picking up,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest listed bank. “The yields are far too low given the fundamentals.”

To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net

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

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