Treasuries rose, rallying from losses yesterday, on concern Europe’s fiscal crisis will slow economic growth around the world.
U.S. 10-year yields were nine basis points from the record low as speculation that Greece will abandon the euro drives demand for the relative safety of U.S. debt. Societe Generale SA, one of the 21 primary dealers that trade with the Federal Reserve, said it’s still bullish. Treasuries returned 1 percent this month as of yesterday, based on Bank of America Merrill Lynch indexes. Investors tracking the MSCI All-Country World Index of stocks lost 8.1 percent including reinvested dividends.
“Slowing growth in the U.S. and China and the risk of a recession in Europe are helping Treasuries,” said Will Tseng, who invests in U.S. debt at Taipei-based Shin Kong Life, which has the equivalent of $52 billion in assets. “The fundamental question of whether Greece will leave the euro zone is still there.” Tseng said he has been buying 10-year notes this month, including purchases over the past two days.
Benchmark 10-year yields declined one basis point, or 0.01 percentage point, to 1.77 percent as of 6:51 a.m. in London, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 advanced 3/32, or 94 cents per $1,000 face amount, to 99 27/32. The yield slid to 1.6886 percent on May 17, approaching the record low of 1.6714 percent set in September.
Record Low Yields
A five-year Treasury auction this week drew a record-low rate of 0.748 percent, and a seven-year note sold at a least-ever yield of 1.203.
Japan’s 10-year rate rose 1 1/2 basis point to 0.88 percent today. It was as low as 0.815 percent on May 18, a level not seen since 2003.
The MSCI Asia Pacific Index (MXAP) of stocks dropped as much as 0.7 percent to the lowest level since Dec. 21, helping increase demand for debt.
Treasuries are scheduled to close at 2 p.m. New York time and remain shut on May 28 for the Memorial Day holiday in the U.S., according to the Securities Industry and Financial Markets Association in New York.
China’s biggest banks may fall short of loan targets for the first time in at least seven years, three bank officials with knowledge of the matter said.
U.S. Durable Goods
U.S. companies placed fewer orders for computers, machinery and other capital equipment for a second month, according to a government report yesterday. European services and manufacturing output contracted more than economists forecast, a survey of purchasing managers showed yesterday.
Treasuries fell yesterday after European Union leaders ended a summit in Brussels by urging Greece’s voters to elect a government on June 17 that makes the spending cuts needed to keep the country in the euro.
The difference between two-year swap rates and same-maturity U.S. debt shrank to 34 basis points from this month’s high of 42 basis points on May 16, indicating emerging demand for higher-yielding assets.
Swap rates are usually higher than those on government debt because they are based on bank transactions that contain credit risk.
Treasury “yields will stay low, but the rally is losing momentum,” said Hideo Shimomura, who helps oversee the equivalent of $75.3 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. “European governments are defending the euro. That’s the priority. The fear of the destruction of the euro will fade.”
Shimomura said he’s sticking with his bets on longer-term Treasuries, the ones that gain most in a rally.
‘Bullish’ Societe Generale
“We remain bullish U.S. Treasuries, for lack of better alternatives,” according to a report that Ciaran O’Hagan, the head of European interest-rate strategy at Societe Generale in Paris, sent by e-mail yesterday. Europe’s decision-making process is “dysfunctional,” leaving “markets hostage to uncertainty.”
Record-low yields are signaling that inflation is in check, said Jack Malvey, the chief global markets strategist at Bank of New York Mellon, which has and $1.3 trillion under management.
“There is an inflationary signal, which is not to worry about it over the very near term,” Malvey said yesterday on the “Bloomberg Surveillance” radio program with Ken Prewitt and Tom Keene.
Investors demand 2.56 percentage points of extra yield to buy 30-year bonds instead of two-year notes. The spread narrowed to 2.48 percentage points on May 17, a seven-month low. Thirty-year bonds are more sensitive to inflation because of their long maturity.
The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.16 percentage points, in line with the average over the past decade.
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