Treasuries Gain for Fourth Straight Week on European Debt

Treasuries advanced for a fourth straight week, in the longest stretch of gains since August, as concern the European sovereign-debt crisis was worsening drove demand for the safety of U.S. government debt.

The yield on the 10-year note dropped below 2 percent yesterday amid a report that Spanish banks’ borrowings from the European Central Bank jumped last month. Treasuries were supported after a report showed China’s gross domestic product expanded less than economists forecast, encouraging speculation global growth is slowing. Retail sales slowed in March, according to a Bloomberg News survey before a report next week.

“The focus has shifted back to Europe,” said Jacob Oubina, senior U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Federal Reserve. “All the increasing concerns across the pond, the doldrums in Spain, are beginning to impact Treasuries.”

Yields on 10-year notes decreased seven basis points, or 0.07 percentage point on the week, to 1.98 percent in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 advanced 20/32, or $6.25 per $1,000 face amount, to 100 5/32.

Strong Streak

The four weeks of price gains was the longest winning streak since the five days ended Aug. 19, according to data compiled by Bloomberg. Yields have declined 31 basis points since the week ended March 16.

Thirty-year bond yields decreased nine basis points to 3.13 percent. The debt, sensitive to inflation because of its long maturity, returned 2.7 percent this month as of April 12, compared with a 0.9 percent gain for the broad market, according to Bank of America Merrill Lynch indexes.

Valuation measures show U.S. government debt is approaching the most expensive levels in almost five weeks. The term premium, a model created by economists at the Fed, reached negative 0.64 percent yesterday after touching negative 0.65 percent on April 10. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note and 30-year bond futures in the week ending April 10, according to U.S. Commodity Futures Trading Commission data.

Futures Positions

Speculative 10-year note short positions, or bets prices will fall, outnumbered long positions by 206,589 contracts on the Chicago Board of Trade. Net-short positions fell by 5,538 contracts, or 3 percent, from a week earlier. For the 30-year bond, net-short positions fell by 4,312 contracts, or 20 percent.

Treasuries were supported yesterday as China’s statistics bureau reported gross domestic product expanded 8.1 percent in the first quarter from a year earlier, the slowest since 2009. The median estimate in a Bloomberg News survey was for 8.4 percent growth.

“We’ve had somewhat friendly data, in the form of China GDP,” said David Ader, head of U.S. government bond strategy at CRT Capital Group in Stamford, Connecticut.

The cost of insuring against a Spanish default jumped yesterday to a record as Prime Minister Mariano Rajoy struggled to prevent the nation from becoming the fourth euro-region member to need a bailout.

Spain’s Debt

Credit-default swaps on Spain rose 17 basis points to 498 yesterday in London, surpassing the high closing price of 493, according to CMA. The contracts are up from 431 at the start of the month and 380 at the end of 2011, signaling deterioration in investor perceptions of credit quality.

The yield on Spain’s 10-year bond reached 6 percent, close to the four-month high of 6.02 percent reached April 11. Spanish banks’ borrowings from the ECB jumped by almost 50 percent in March, reaching the most on record, as lenders tapped emergency loans and channel some of it into sovereign-debt purchases.

“It’s going to be a long process before Europe is out of the woods,” said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York. “Europe has an effect on our markets as well, and it will have an effect on economic data and how our economy grows.”

Retail sales rose 0.3 percent in March, down from 1.1 percent expansion in the previous month, a Commerce Department report April 16 is forecast to show.

Inflation Reading

The cost of living in the U.S. increased 0.3 percent in March, matching forecasts, according to a report from the Labor Department yesterday. Wholesale prices were unchanged in March, Labor Department figures showed April 12 in Washington.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt known as the break-even rate, was 2.27 percentage points yesterday. The average for the past decade is 2.14 percentage points.

The five-year, five-year forward break-even rate, a measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.69 percent, below its 2.76 percent average during the past decade.

It touched 2.78 percent on March 19, the highest in 2012 and reached 3.23 percent in August, the highest since December 2010. The measure projects annual price increases over a five- year period beginning in 2017.

Negative Yields

Treasury 10-year notes pay negative 0.7 percentage point, after subtracting consumer price increases. The so-called real yields in the U.S. averaged 2.6 percentage points during the past 20 years. It hit a high of 5.9 percentage points in August 2009.

The U.S. will sell $16 billion of five-year Treasury Inflation Protected Securities on April 19. The U.S. sold $12 billion of the securities at the previous sale Dec. 15.

The Treasury sold $66 billion in notes and bonds this week, including $13 billion in 30-year bonds April 12, $21 billion in 10-year notes the previous day and $32 billion in three-year notes on April 10. This week’s sales raised $23.1 billion of new cash as maturing securities held by the public total $42.9 billion.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

Bloomberg reserves the right to edit or 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.