Treasury Notes Decline for a Third Week Amid Greek Debt Bailout Optimism

Treasuries fell, with 10-year notes declining for a third straight weekly, amid speculation euro- area finance ministers will reach an agreement to provide funding for Greece, discouraging demand for the safest assets.

Yields on benchmark 10-year notes remained above 2 percent even after a report showed consumer prices increased less than forecast by economists. U.S. debt securities have lost 0.5 percent this year, while corporate bonds have returned 2.3 percent, according to Bank of America Merrill Lynch indexes.

“We’ve had some positive news out of Europe and the economic data of late has been stronger, which has been weighing on Treasuries,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Federal Reserve. “In a vacuum, yields should head higher if things stay like this, but there is still a lot of uncertainty over what the Fed will do. And that contains any selloff.”

Yields on 10-year notes rose two basis points, or 0.02 percentage point, to 2 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 fell 5/32, or $1.56 per $1,000 face amount, to 99 31/32. The yields, which slid to a record low 1.67 percent on Sept. 23, gained for a second day and have increased one basis point this week.

Treasuries extended losses after Italian Prime Minister Mario Monti, German Chancellor Angela Merkel and Greek Prime Minister Lucas Papademos expressed optimism on a conference call that an “agreement on Greece” can be reached at a Brussels meeting of euro-area finance ministers on Feb. 20.

Risk Rally

The Stoxx Europe 600 Index (SXXP) gained 0.6 percent, pushing its advance this year to 9 percent, as investors become more comfortable owning higher-returning assets. Standard & Poor’s 500 Index rose 0.2 percent.

“The bond market is trading as if there’s a better than 50 percent probability that a deal will get done,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “The bond market is also showing signs of growth in the U.S. as the rest of Europe may go into recession.”

The consumer-price index increased 0.2 percent after no change the prior month, the Labor Department reported today in Washington. Economists surveyed by Bloomberg had forecast a 0.3 percent gain. Over the past 12 months, prices climbed 2.9 percent, the smallest year-to-year advance since March 2011.

Monetary Policy

“It’s hard to see inflation of any significant magnitude coming in the U.S. for a while,” Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock Inc., said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The Fed is going to keep moving and keep being accommodative. I think they’re ultimately going to go down the road of QE3. If inflation continues to be tame, then I think they can go down the road and focus on their statutory obligations to keep moving and get to full employment.”

A few members of the central bank’s policy-setting Federal Open Market Committee said the group may soon have to consider more asset purchases, while others said the economic outlook would have to deteriorate first, according to minutes of their Jan. 24-25 meeting issued Feb. 15.

The Fed bought $4.96 billion of Treasuries due from May 2018 to February 2020 today as part of its plan to hold down borrowing costs by exchanging shorter-term debt in its holdings for longer ones.

The euro crisis and the Fed’s accommodative policies have lowered the 10-year note yield by 45 basis points from where it would be otherwise, according to Goldman Sachs Group Inc.

Risk Premium

“With the uncertainty around Greece still unresolved, markets remain in a ‘wait and see’ mode,” Silvia Ardagna, an analyst at Goldman Sachs, wrote in a note to clients. “Some of euro-area risk needs to be removed before we can recommend taking short positions on U.S. Treasuries.”

A measure of traders’ expectations for inflation that is tracked by the Fed has risen this year to 2.54 percent from a low of 2.42 percent in January. The five-year, five-year forward break-even rate, which projects annualized price increases over a five-year period starting in 2017, is below its 2.76 percent average over the past decade.

Assuming nonfinancial corporations are at least as healthy as they have been on average over the last 20 years, spreads should narrow by at least 50 basis points for investment-grade bonds and possibly by 100 basis points for high-yield debt, Rieder wrote in a report on the New York-based company’s Website. BlackRock manages $3.51 trillion.

Swap Spreads

The Bank of America index (SXXP) of U.S. corporate and below- investment-grade bonds yields 2.96 percentage points more than Treasuries. The spread narrowed to 2.95 percentage points on Feb. 14, the least since August.

Even so, some measures of stress in global credit markets have stopped easing as the rescue plan for Greece still threatens to unravel and some of the largest U.S. and European banks face potential ratings cuts.

The U.S. two-year interest-rate swap spread touched 31.25 basis points yesterday, the most since the beginning of the month. The measure rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net Cordell Eddings in New York at ceddings@bloomberg.net

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

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