Treasuries Advance as Euro Concern Spurs Safety Demand

Treasuries rose, changing course after yesterday’s drop, as a slide in stocks and sovereign-debt concern in Europe increased demand for the safest assets.

U.S. government securities gained 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 today. 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 at Mizuho Securities USA Inc. in New York, one of 21 primary dealers that trade with the Fed. “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 0.04 percentage point, to 2.16 percent at 9:33 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 advanced 11/32, or $3.44 per $1,000 face amount, to 98 18/32. The yields increased two basis points yesterday.

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

The Stoxx Europe 600 Index of shares dropped 1 percent, and the Standard & Poor’s 500 Index fell 0.6 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.

American policy makers don’t rule out further options to support growth, Bernanke said March 27, according to a transcript of an interview with ABC News provided by the network.

The Fed plans to sell today as much as $8.75 billion of Treasuries maturing from June 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 central bank bought $2.3 trillion of debt under two rounds of quantitative easing from December 2008 to June 2011.

Seven-Year Auction

The U.S. seven-year notes being sold by the government today yielded 1.585 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 sale yesterday attracted reduced demand. The bid-to-cover ratio was 2.85 at the $35 billion note sale, the least since the 2.71 level at the August auction.

“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.

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 OECD urged European finance ministers to lift the limit on emergency lending to governments to bolster confidence. European officials will meet in Copenhagen tomorrow to discuss a one-year increase in the ceiling on rescue aid to 940 billion euros ($1.3 trillion), according to a draft statement written for finance ministers.

The U.S. 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. GDP

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 today in Washington. It gained 1.8 percent in the prior quarter.

The number of Americans seeking unemployment benefits dropped last week to the lowest level in almost four years. 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. The median forecast in a Bloomberg News survey called for 350,000 claims. With the report, the government data also contain revisions dating back to 2007.

Ten-year Treasuries have underperformed German bonds this year, with the extra yield investors demand to hold the U.S. securities widening yesterday to as much as 37 basis points, the most since February 2011. The spread was 34 basis points today. German bonds are little changed this year, according to the Bank of America Merrill Lynch indexes.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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