Treasuries Advance as Euro Concern Spurs Safety Demand

Treasuries rose, pushing 10-year yields to a two-week low, as a slide in stocks on concern Europe’s sovereign-debt crisis will worsen fueled demand for the safest assets.

U.S. government bonds gained, changing course after falling yesterday, as traders prepared to bid for $29 billion of seven- year debt in the last of the week’s three note sales. Treasuries rose even after initial claims for U.S. jobless benefits fell. Greece will probably have to restructure its debt again, a Standard & Poor’s official said. Federal Reserve Chairman Ben S. Bernanke said this week U.S. economic recovery isn’t assured.

“Europe had dropped out of the headlines during the down- trade and has resurfaced and is back on the radar,” said Richard Bryant, a trader at Mizuho Securities USA Inc. in New York, one of 21 primary dealers that trade with the U.S. central bank. “The chairman reminded the market that the Fed stands ready to act to keep interest rates low. Those two things turned things around.”

Yields on 10-year notes dropped four basis points, or 0.4 percentage point, to 2.16 percent at 11:47 a.m. in New York, according to Bloomberg Bond Trader prices. It touched 2.15 percent, the lowest level since March 14. The 2 percent securities maturing in February 2022 advanced 10/32, or $3.13 per $1,000 face amount, to 98 17/32. The yields increased two basis points yesterday.

Thirty-year bond yields slid four basis points to 3.27 percent and touched 3.26 percent, the lowest since March 13.

The Standard & Poor’s 500 Index fell 0.8 percent, and the Stoxx Europe 600 Index of shares dropped 1.3 percent.

Loss for Quarter

Treasuries have lost 1.2 percent this quarter in the biggest three-month decline since 2010, according to Bank of America Merrill Lynch indexes, as the U.S. economy showed signs of improvement. They slid 2.7 percent from October through December of 2010.

The declines were led by securities maturing in 10 years or more, which are down 5.1 percent since Dec. 31, Merrill indexes show. The global government bond market has returned 0.4 percent since then, while the global broad bond market is up 1.1 percent, the data show.

The 10-year yield will climb to 2.54 percent by year-end, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings. The yield has averaged 3.86 percent over the past decade.

Treasuries gained today after Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said another Greek restructuring “may be down the road” and may involve bailout partners such as European governments.

‘Far From Over’

“While the situation in the euro region may have improved, it’s far from over, and this concern should continue to underpin demand for haven assets like Treasuries,” said Matteo Regesta, a senior fixed-income strategist at BNP Paribas SA in London.

The Organization for Economic Cooperation and Development said the situation in the euro area is “expected to remain fragile” as the economic recovery lags behind that of the U.S.

The American economy will grow 2.9 percent in the first quarter and 2.8 percent in the following three months, according to the OECD’s forecast. On a weighted average, the three largest euro-area economies, Germany, France, and Italy, will shrink by an annualized 0.4 percent in the first quarter.

U.S. gross domestic product grew at a 3 percent annual rate in the last three months of 2011, the same as previously estimated, revised figures from the Commerce Department showed.

Initial jobless claims fell 5,000 in the week ended March 24 to 359,000, the lowest since April 2008, the Labor Department reported today in Washington.

Further Options

U.S. policy makers don’t rule out further options to support growth, Bernanke said March 27, according to a transcript of an ABC News interview provided by the network. The central bank bought $2.3 trillion of debt under two rounds of quantitative easing from December 2008 to June 2011.

The Fed sold $8.6 billion of Treasuries today maturing from July 2014 to March 2015 as part of a program to replace $400 billion of shorter-term debt in its holdings with longer maturities to cap borrowing costs.

The U.S. seven-year notes being sold by the government today yielded 1.575 percent in pre-auction trading, compared with 1.418 percent at the offering of the securities on Feb. 23.

Investors bid for 3.11 times the amount offered last month, compared with an average of 2.86 for the past 10 auctions. Direct bidders, non-primary dealers buying for their own accounts, bought 19.3 percent, the most since the Treasury Department revived sales of the notes in February 2009.

The U.S. five-year note sale yesterday attracted reduced demand. The bid-to-cover ratio was 2.85 at the $35 billion note sale, the least since the August auction.

‘Keep Traders Cautious’

“Historically, the performance of the five-year auction tells little about the seven-year which follows, but the five- year results are likely to keep traders cautious,” wrote Larry Dyer, a fixed-income strategist at HSBC Holdings Plc in New York, in a research note today.

A $35 billion two-year auction on March 27 drew bids for 3.69 times the amount of debt offered, compared with the average of 3.53 for the prior 10 sales.

Ten-year Treasuries have underperformed German bonds this year, with the extra yield investors demand to hold the U.S. securities widening yesterday to 37 basis points, the most since February 2011. The spread was 36 basis points today. German bonds are little changed this year, according to the Bank of America Merrill Lynch indexes.

Inflation Bets

The five-year, five-year forward break-even rate, the Fed’s preferred measure for determining inflation expectations and which projects the pace of consumer-price increases starting in 2017, fell to 2.71 percent on March 26 from 2.78 percent on March 19, the highest level since August. The average for the past decade is 2.76.

The gap between the yields on 10-year Treasury Inflation- Protected Securities and conventional government debt narrowed for a seventh day to 2.33 percentage points in its longest slide since March 2010. The figure, called the 10-year break-even rate reflects traders’ outlook for inflation over the next decade.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

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