U.S. 10-Year Yield Drops Under 2%

Treasury (USGG10YR) 10-year note yields traded below 2 percent for a fourth day as European officials prepared to issue a statement on progress toward a Greek aid package amid efforts to contain the region’s debt crisis.

U.S. debt pared earlier gains after Luxembourg Prime Minister Jean-Claude Juncker said he’s confident euro-area finance ministers will make a decision on a bailout for Greece at their next meeting on Feb. 20. Foreign investors held 47.6 percent of outstanding public Treasury debt as of December, the smallest proportion since October 2006, Treasury data show. A few members of the Federal Open Market Committee meeting said the central bank may soon have to consider more asset purchases, according to meeting minutes released today.

“It’s further progress in the debt talks,” saidThomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We were under the impression that this was falling apart so you’d better be long Treasuries.”

Yields on 10-year notes fell one basis point, or 0.01 percentage point, to 1.92 percent at 2:40 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 rose 1/8, or $1.25 per $1,000 face amount, to 100 22/32. The yield touched 1.90 percent, the least since Feb. 7.

Fed Stance

The central bank unexpectedly said on Jan. 25 that benchmark interest rates will stay low until at least late 2014. The yield on the 10-year note dropped seven basis points that day as the Fed said growth in U.S. gross domestic product centered around 2.2 percent to 2.7 percent, down from 2.5 percent to 2.9 percent in November.

Most policy makers expect inflation measured by the personal consumption expenditures index between 1.4 percent and 1.8 percent, down from 1.4 percent to 2 percent in November.

Bernanke, speaking at a news conference after the statements in January, said that the option of further large- scale bond purchases is still “on the table.”

“If inflation is going to remain below target for an extended period and employment progress” is very slow, then “there is a case” for additional monetary stimulus, he said.

A few FOMC members said economic conditions “could warrant the initiation of additional securities purchases before long,” according to minutes of their Jan. 24-25 meeting released today in Washington. “Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain” below 2 percent in the medium run.

Yield Difference

The difference between the yield on the two-year note and the 10-year security, the so-called yield curve, dropped to the least since Feb. 2 before trading little changed at 1.65 percentage points.

“People may have been expecting a more formal committal to another round of quantitative easing; since that’s not the case, we’ve seen the curve steepen out,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, one of the 21 primary dealers required to bid at government debt auctions.

The biggest bond dealers in the U.S. last November forecast the Fed is poised to start a new round of stimulus in the first quarter, injecting more money into the economy by purchasing mortgage securities instead of Treasuries, according to 16 of the 21 primary dealers in a Bloomberg News survey. The Fed may buy about $545 billion in home-loan debt, based on the median of the firms that provided estimates.

Inflation Measure

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a reflection of traders’ outlook known as the break-even rate, was at 2.21 percentage points today. It touched 2.25 percentage points on Feb. 13, the highest since August.

TIPs have returned 2 percent this year, compared with a loss of 0.1 percent for the U.S. Treasury market, according to Bank of America Merrill Lynch Indexes. The securities returned 14.1 percent last year, compared with 9.8 percent for the broader Treasury market.

A Labor Department report tomorrow is forecast to show the producer price index rose by 0.4 percent in January, after a 0.1 percent drop the previous month. A separate report by the Labor Department on Feb. 17 is forecast to show the consumer price index rose by 0.3 percent after being unchanged the previous month.

TIPS Sale

The Treasury is scheduled to sell $9 billion of 30-year Treasury Inflation Protected Securities tomorrow and is also due to announce the size of two-, five- and seven-year auctions for next week.

European finance ministers canceled a Brussels meeting slated for today and held a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($170 billion) along with about 100 billion euros of debt relief from private bondholders. Greece needs the money to make a 14.5 billion-euro bond payment on March 20.

Greece said that Europe’s wealthier countries are “playing with fire” by toying with the idea of expelling it from the 17- nation euro area as talks over a second aid program ran into new obstacles. Finance Minister Evangelos Venizelos leveled the accusation after a decision slated for tonight was postponed until Feb. 20 at the earliest.

“There’s been a lot of chatter out of Europe that the Greek bailout may be delayed,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That uncertainty has added to the bid for Treasuries.”

Overseas Demand

Net buying of long-term equities, notes and bonds totaled $17.9 billion during the month compared with net purchases of $61.3 billion the previous month, the Treasury Department said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $87.1 billion in December compared with net buying of $42.9 billion the previous month.

China, the largest foreign lender to the U.S., decreased its holdings of Treasury securities $31.9 billion, or 2.8 percent, to $1.1 trillion, the lowest since June 2010. Its position in longer-term notes and bonds also fell by 2.8 percent or $32.5 billion to $1.1 trillion, the least since June 2010. China increased its position in shorter-term bills by $600 million to $2.9 billion.

The Fed sold $8.6 billion in Treasuries maturing from December 2013 to March 2014 today under its plan to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to reduce borrowing costs further and counter risks of a recession.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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