U.S. Treasuries Halt Three-Week Downturn on European Debt Crisis Concerns

Treasuries rose, with 30-year bonds halting a three-week slide, amid concern Europe’s rescue package for Greece won’t fully resolve the region’s sovereign-debt crisis.

U.S. 10-year yields reached the lowest in a week yesterday as Fitch Ratings lowered Greece’s credit rating and said a default is highly likely, fueling refuge demand. The U.S. sold $99 billion in notes while the Federal Reserve bought $3.8 billion in longer-term Treasuries. The difference between the yields on 10-year notes and inflation-indexed securities was close to the highest since August before a report that is forecast to show U.S. manufacturing output expanded in February.

“We started the week with optimism that an agreement was in place in Greece that would take some pressure off that European crisis, but any selloff was met with buyers as it turns out nothing has really changed,” said Larry Milstein, managing director in New York of government trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “There is still a lot of uncertainty, and the Fed is still buying, which is giving support to Treasuries.”

Yields on 30-year bonds fell five basis points, or 0.05 percentage point, this week to 3.10 percent, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in February 2042 increased 30/32, or $9.38 per $1,000 face amount, to 100 1/2.

Yield Range

The 10-year note yield reached 1.97 percent, the least since Feb. 16. It fell three basis points for the week and has traded in a range of 1.79 percent to 2.16 percent since the start of November as Europe’s debt crisis sustained demand for the safest securities.

Volume (ICPTVOL) in the Treasury market remained below the one-year average of $275 billion. About $186 billion of Treasuries changed hands yesterday through ICAP Plc, the world’s largest interdealer broker.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed Feb. 23 at 77.1 basis points, near the lowest level since July 2007. The five-year average is 112 basis points.

Treasuries rose Feb. 23 after a U.S. sale of $29 billion in seven-year notes drew stronger-than-average demand on concern Europe’s debt crisis hasn’t been contained.

Auction Demand

The bid-to-cover ratio, which gauges demand by comparing orders to buy with the amount of securities offered, was 3.11, compared with an average of 2.81 for the previous 10 sales. The auction was the last of three note offerings this week totaling $99 billion.

“It looks like a good one,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Treasuries are what people want to own because they think it’s the safest thing out there. It’s fear of Europe falling apart.”

A $35 billion U.S. five-year auction Feb. 22 drew a yield of 0.9 percent, compared with a forecast of 0.901 percent in a Bloomberg survey of seven primary dealers, while a two-year note auction of the same amount on the previous day drew a yield of 0.310 percent, matching pre-auction trading.

The central bank purchased long-term securities yesterday and Feb. 22, according to the New York Fed website. The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs under a program it plans to conclude in June.

Fed View

Fed Bank of St. Louis President James Bullard said additional asset purchases, or quantitative easing, aren’t needed with inflation including food and fuel higher than the central bank’s 2 percent target.

“I wouldn’t take QE3 off the table ever,” Bullard said in a CNBC interview, referring to a third round of purchases. “We should use it only if the economy deteriorates and especially if the inflation numbers start to drift down into disinflation or deflation. Headline inflation is above target.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the break- even rate, widened this week to as much as 2.34 percentage points, close to the most since August. It has averaged 2.14 percentage points during the past decade.

Debt Buying

“Bullard said he wouldn’t take QE3 off the table so that brought in some buying into the market,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

The Institute for Supply Management’s manufacturing index reached 54.5 in February from 54.1 the previous month, according to a survey of 55 economists conducted by Bloomberg News before the March 1 report from the Tempe, Arizona-based group.

Greece agreed upon the biggest debt restructuring in history as it seeks to reduce national debt to 120 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130 billion-euro ($175 billion) international bailout. An agreed debt swap, known as private- sector involvement, will slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.

Greece’s debt restructuring may trigger credit-default swaps insuring $3.2 billion of bonds if the government uses clauses designed to mop up investors unwilling to take part.

Trigger Words

Greece published yesterday the formal offer document for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The restructuring uses so-called collective action clauses to discourage holdouts, the use of which would trigger credit-default swap insurance contracts on the nation’s debt, according to the rules of the International Swaps & Derivatives Association.

“The focus has been on what’s going on in Greece,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. The agreement “didn’t represent a final solution to the problem.”

U.S., Chinese and Japanese officials say they will press euro-area countries to do more to merit outside help when Group of 20 finance ministers and central bank governors gather in Mexico City today for a meeting dominated by Europe’s sovereign- debt woes, days after Greece secured its second bailout.

German Finance Minister Wolfgang Schaeuble said “there are no guarantees” that the second financial bailout for Greece will work.

Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending Feb. 21, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 65,285 contracts on the Chicago Board of Trade. Net-short positions rose by 20,885 contracts, or 47 percent, from a week earlier, the Washington- based commission said in its Commitments of Traders report.

Treasuries have lost 0.4 percent this year, according to a Bank of America Merrill Lynch index, after gaining 9.8 percent last year, the most since 2008.

To contact the reporter 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 USGG10YR <Index> CN

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.