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Treasury 10-Year Yield Below 2% on Europe’s Debt Crisis

Treasury 10-year note yields dropped below 2 percent for a fourth day as concern the European sovereign-debt crisis is far from being resolved increased investor appetite for the safest assets.

Yields on the benchmark note dropped to almost the lowest level since March before the Federal Reserve bought $4.55 billion of longer-term Treasuries as part of a plan to boost the economy. Spain is scheduled to auction two- and 10-year debt tomorrow after surging borrowing costs there this month helped boost demand for Treasuries.

“The story is being driven by uncertainty in Europe, and as such we are seeing risk-off that is benefiting Treasuries,” said Larry Milstein, managing director in New York of government- and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The Spanish auction will give us short-term clarity. But, in the longer term, we are in the same boat -- and maybe worse, as Spain’s economy is bigger than Portugal’s, Greece’s and Ireland’s.”

The benchmark 10-year Treasury yield fell two basis points, or 0.2 percentage point, to 1.98 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2022 gained 6/32, or $1.88 per $1,000 face amount, to 100 7/32. The yield fell on April 16 to 1.94, the lowest since March 6.

Fed’s Twist

The Fed bought Treasuries due from May 2020 to February 2022 after earlier selling $8.63 billion of notes due from July 2013 to January 2014 as part of its program, known as Operation Twist, to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs and counter risks of a recession.

Treasuries have returned a gain of 1 percent this month, according to Bank of America Merrill Lynch Indexes. The MSCI All-Country World Index (MXWD) of stocks this year returned 9.8 percent, including reinvested dividends.

“We won’t stray too far from 2 percent on 10-years till we hear from Spain tomorrow,” said Sean Murphy, a trader at Societe Generale in New York, one of the 21 primary dealers that trade with the Fed. “People are looking to see if there’s enough sponsorship for the paper.”

Treasury Inflation Protected Securities are rallying amid demand for insurance against rising costs as the economy improves and the International Monetary Fund raised its forecast for U.S. economic expansion this year to 2.1 percent from 1.8 percent.

‘Weak to Neutral’

An index of the bonds has gained 2.7 percent this year, versus a 0.2 percent loss for conventional debt, Bank of America Merrill Lynch data show. Thirty-year bonds, among the most sensitive to inflation because of their long maturities, slid 4 percent, the figures show. The U.S. plans to sell $16 billion of five-year TIPS tomorrow.

The Washington-based IMF says a resurgence of Europe’s debt turmoil is the biggest threat to global growth even after steps taken by governments and the European Central Bank helped ease tensions in financial markets.

“The concern is the potential for contagion of the European credit crisis through Spain, which is giving Treasuries a boost,” said Russ Certo, managing director of rates trading at Gleacher & Co. in New York. He said he sees the benchmark bond yield falling to as low as 1.65 percent. “The prospect for resolution of geopolitical issues -- from the Fed to European uncertainty -- are weak to neutral at best, which should continue to support the market.”

‘Haunting Reality’

Spain’s 10-year yields have jumped more than 1 percentage point since Prime Minister Mariano Rajoy said on March 2 that the nation won’t meet a budget deficit target for this year.

Investors in Treasuries should “buy dips” in prices as “headlines out of Europe will worsen in the coming months as the haunting reality of too much debt and not enough growth does its dirty work,” William O’Donnell, head U.S. government-bond strategist in Stamford, Connecticut, at primary dealer RBS Securities Inc., wrote in a note to clients today.

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.3 percentage points from 1.95 percentage points at the end of 2011.

U.S. consumer prices rose 2.7 percent in March from a year earlier, slowing from 2.9 percent in February, the Labor Department said on April 13. Ten-year Treasuries yield negative 0.66 percent after accounting for costs in the economy. The so- called real yield has been less than zero for almost a year.

Technical Analysis

The decline in 10-year Treasury yields may be coming to an end after they breached a technical barrier, according to Shin Kong Life Insurance Co., citing trading patterns.

Treasury rates of 2 percent are equal to the five-day moving average, which will be a floor for the yield, said Will Tseng, who uses technical analysis to invest in U.S. debt at Taipei-based Shin Kong Life, which has the equivalent of $52.6 billion in assets. The 20-day moving average of 2.13 percent will be the upper limit over the next week or two, Tseng said.

The Treasury will tomorrow announce the sizes of three note sales scheduled for next week. The U.S. will auction $35 billion of two-year securities on April 24, the same amount of five-year debt on the following day and $29 billion of seven-year securities on April 26, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.

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

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