U.S. 10-Year Yield Falls 3-Month Low on Greece Boost

Treasuries rose, pushing 10-year yields to the lowest level since February, as Greek leaders struggled to form a government, underscoring political risk in the euro region and adding demand for the safest assets.

The 30-year bond yield touched the lowest level since February as Greece faced the prospect of becoming the first developed nation to default on its debt, two months after forcing through the biggest-ever sovereign bond restructuring. Three-year note yields also approached a three-month low as the government prepared to sell $32 billion of the securities in the first of three note auctions this week totaling $72 billion.

“The problem is there’s no resolution to any of these things happening in Europe,” said Tom Tucci, head of Treasury trading in New York at Canadian Imperial Bank of Commerce. “Rates are going to stay here for a long period of time. People keep insisting these yield levels aren’t sustainable, yet we continue to move to higher prices every day.”

The 10-year yield fell six basis points, or 0.06 percentage point, to 1.81 percent at 10:24 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 advanced 1/2, or $5 per $1,000 face amount, to 101 21/32. The yield declined to the lowest since Feb. 3.

The yield on the 30-year bond dropped six basis points to 3 percent.

Valuation Measures

Valuation measures show Treasuries rose to near the most expensive levels ever. The term premium, a model created by economists at the Federal Reserve, touched negative 0.75 percent, close to the most expensive level ever of 0.79 percent reached on Feb. 2. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

“The market is concerned about the risks and the stability of Europe,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt widened to as much as 14.25 basis points, the most since Jan. 17. Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The Fed bought $4.7 billion in notes maturing from May 2018 to April 2019 today as part of its program known as Operation Twist to replace shorter-term debt with longer-term securities.

Greek Politics

Greece’s political leaders are struggling to form a coalition government after voters turned to anti-bailout parties at the May 6 election, calling into question the country’s ability to impose the measures needed to guarantee its future in the euro. Alexis Tsipras, whose Syriza party placed second in Greek elections on May 6, said he would forge ahead with plans to form a coalition government of left-wing parties after he was handed the mandate by President Karolos Papoulias.

The gain in Treasuries was tempered before this week’s supply. In addition to today’s three-year auction, the government will sell $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on May 10.

Three-year yields were little changed at 0.36 percent after falling to 0.35 percent yesterday, the lowest since Feb. 8.

Debt Sale

The securities scheduled for sale today yielded 0.38 percent in pre-auction trading, compared with 0.427 percent the previous time the notes were sold on April 10. Investors bid for 3.36 times the amount of available debt last month. The average over for the past 10 sales is 3.38.

“We haven’t been able to price in any meaningful concession for this week’s auctions,” Lyngen of CRT Capital said. “The three-year most likely won’t require much. It’s not a difficult issue to take down.”

Three-year notes have returned 0.2 percent this year, while 10-year securities advanced 1 percent, Bank of America Merrill Lynch indexes show. Thirty-year bonds, which are among the most sensitive to inflation because of their long maturity, tumbled 2.3 percent.

Treasuries investors reduced bets the securities will advance and raised neutral positions to the highest in a month, according to a weekly survey by JPMorgan.

Net Bets

The proportion of “net longs” was cut to zero from six percentage points last week as the level of outright longs dropped to equal the level of outright shorts that was unchanged at 17 percent. A long position is a bet that an asset will increase in value, while a short is a wager it will decrease.

Ten-year notes yield 1.6 percentage points more than the upper end of the Fed’s target range for overnight bank loans, the smallest difference in three months, based on closing prices. The average over the past five years is 2.08 percentage points.

“The market is very expensive,” said Kei Katayama, who helps oversee the equivalent of $62 billion in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second-largest securities company. “If the European situation clears up, then Treasury prices should correct.”

Ten-year yields will climb to 2.25 percent by the end of the second quarter, according to analysts’ forecasts compiled by Bloomberg. They will rise to 2.52 percent by year-end, a separate survey shows.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net;

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

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