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Treasuries Head for 2nd Monthly Gain on Euro Debt Crisis

Treasuries headed for a second monthly gain as speculation Europe’s debt crisis will break up the 17-nation currency bloc and slow global economic growth boosted demand for U.S. fixed-income assets.

U.S. government securities have returned 2.6 percent since the end of March, according to Bank of America Merrill Lynch indexes, reflecting demand for the relative safety of the nation’s debt. Investors tracking the MSCI All-Country World Index of stocks lost 9.4 percent. Treasury yields are poised to “grind lower,” according to Deutsche Bank AG, as European governments struggle to cut spending.

“The demand for ultra-safe assets is enormous given what’s going on in the euro zone,” said Padhraic Garvey, head of developed markets at ING Bank NV in Amsterdam. “Quality flight rather than the macro backdrop is the dominating force at the moment.”

The benchmark 10-year yield was little changed at 1.74 percent at 10:31 a.m. London time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 traded at 100 3/32. The yield dropped to a record 1.6714 on Sept. 23 and has declined 18 basis points this month.

U.S. 10-year yields may decline to 1.4 percent or lower, tracking the slide in German yields, according to Hans Goetti, Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which manages the equivalent of $1.5 billion in assets. Ten-year bund yields dropped to an all-time low 1.351 percent on May 24. Goetti said he has been buying U.S. debt for the past 12 months.

Treasury trading was shut yesterday in the U.S. for Memorial Day.

Inflation Expectations

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 was 2.14 percentage points. The figure is in line with the average over the past decade.

Spanish 10-year yields climbed as high as 6.53 percent, the most since November, on concern the nation’s banks will need additional financial support to weather Europe’s debt crisis.

The extra yield investors demand to hold the securities instead of their German counterparts expanded to 5.14 percentage points, the widest since the introduction of the euro in 1999.

Deutsche Bank, one of the 21 primary dealers that trade directly with the Federal Reserve, is skeptical of trades that add risk, according to a report on May 25.

‘Remain Buyers’

“We remain buyers of Treasuries on dips,” Dominic Konstam, global head of interest-rate research in New York for the bank, wrote in the report. “We continue to expect Treasury yields to grind lower.”

Treasuries aren’t attractive to Yoshiyuki Suzuki, Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co., which has the equivalent of $70.5 billion in assets.

“Yields are too low,” Suzuki said. “We don’t have to buy at the current level. The U.S. economy is showing signs of slowing, but it’s not so bad.”

The U.S. added 150,000 jobs in May, after a gain of 115,000 in April, based on a Bloomberg News survey of economists before the Labor Department report on June 1. The Conference Board will say today its index of consumer confidence rose to 69.5 in May from 69.2 in April, based on survey estimates.

The Fed plans to sell as much as $8.75 billion of Treasuries due from June 2014 to May 2015 today, according to the Fed Bank of New York’s website. The sales are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to support the economy by keeping down borrowing costs.

Comparatively Cheap

While Treasury 10-year (USGG10YR) note yields approach record lows, they’re cheap compared with AAA debt of other nations, helping trigger record demand at U.S. bond auctions even in a fourth year of $1 trillion budget deficits.

Yields on the benchmark security are 24 basis points higher than the average for comparable debt of nations from Germany to Australia, above the average of 12 basis points in the past year, data compiled by Bloomberg show. The gap between U.S. notes and German bunds widened to 37 basis points. As recently as November, bunds yielded 34 basis points more than Treasuries.

“Looking at the spectrum of opportunities in safe-haven assets, yields in 10-year Treasuries don’t really look that bad,” Gregory Whiteley, who manages investments in government debt at Los Angeles-based DoubleLine Capital LP, which has $35 billion in assets, said in a May 25 telephone interview.

Even after boosting the amount of marketable debt outstanding to more than $10 trillion from $4.34 trillion in mid-2007, the Treasury is attracting record demand at auctions. The cost to President Barack Obama’s administration of financing a fourth straight deficit has never been lower. The extra yield investors receive on Treasuries is an added benefit for investors seeking a haven from Europe’s sovereign-debt turmoil.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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