Treasuries Advance as Greek Election Boosts Safety Bid
Treasuries extended a weekly gain as reports showing industrial production unexpectedly fell and consumer confidence slid added to speculation the Federal Reserve will provide more stimulus to sustain economic growth.
Yields on the benchmark 10-year note remained less than a quarter-percentage point above the record low reached two weeks ago as investors continue to seek a refuge from Europe’s financial turmoil. Volatility rose to the highest since March amid speculation central banks will take steps to boost growth as investors await Greek elections this weekend.
“The weaker the numbers are that come out on our economy, the more likely they will lean toward doing something,” Douglas Swanson, co-manager of a $26.5 billion fund at JPMorgan Chase & Co.’s J.P. Morgan Asset Management, said of the Fed. “There’s nothing in the short term that’s going to cure Europe. They need to come up with a credible long-term plan.”
The 10-year yield dropped seven basis points, or 0.07 percentage point, to 1.58 percent at 5:21 p.m. New York time, according to Bloomberg Bond Trader data. The yield, which fell to a record 1.44 percent on June 1, was down six basis points on the week. The 1.75 percent security due in May 2022 increased 19/32, or $5.94 per $1,000 face amount, to 101 18/32.
Thirty-year bond yields fell six basis points to 2.68 percent. They touched a record low 2.51 percent on June 1. The two-year note yield declined two basis points to 0.27 percent.
Trading volume shrank. About $211 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, down 22 percent from $272 billion yesterday. It was the lowest since May 29. The average volume over the past year was $256 billion.
Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending June 12, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 95,385 contracts on the Chicago Board of Trade. Net-short positions rose by 57,493 contracts, or 152 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
Volatility rose today to 95.4 basis points, the highest since December, according to Bank of America Merrill Lynch’s MOVE index. The gauge measures Treasury price swings based on options. The one-year average is 88.2 basis points.
A valuation measure showed U.S. government bonds are at almost the most expensive levels ever. The term premium, a model created by economists at the Federal Reserve, was at negative 0.89 percent, the most costly level since it reached a record of negative 0.94 percent on June 1. The average over the past year is negative 0.46 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
U.S. government securities returned 3.1 percent this quarter through yesterday, Bank of America Merrill Lynch data showed. The MSCI World Index (MXWO) of shares lost 7 percent including reinvested dividends over the period.
Treasuries extended gains today after the Fed Bank of New York’s general economic index dropped to 2.3 this month, down from 17.1 in May. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.
“It was a pretty soft reading from the Empire manufacturing index,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets. “Although it covers one region, the market is very sensitive to negative news right now.”
Growth in U.S. industrial production decreased 0.1 percent last month, after a revised 1 percent gain in April, according to Fed data. A Bloomberg News survey forecast a 0.1 percent gain. Manufacturing, which makes up about 75 percent of total production, dropped 0.4 percent.
The Thomson Reuters/University of Michigan index of consumer sentiment for June fell to 74.1 from 79.3 at the end of last month. A Bloomberg survey projected a decline to 77.5.
U.S. policy makers meet June 19-20. The Fed purchased $2.3 trillion of bonds from December 2008 to June 2011 in two rounds of a tactic called quantitative easing to stimulate the economy.
The nation’s consumer price index declined 0.3 percent last month, the biggest drop since December 2008, after no change the prior month, the Labor Department reported yesterday. Retail sales fell in May for a second month, data showed June 13, prompting economists to cut forecasts for economic growth.
The gap in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, touched 2.09 percentage points, down from a 2012 high of 2.45 percentage points in March.
The Fed bought $1.35 billion of Treasury Inflation Protected Securities today due from January 2022 to February 2042. The purchase was part of its Operation Twist program to replace $400 billion of short-term debt in its portfolio with longer-term securities through this month in an effort to hold down borrowing costs.
Greece’s election on June 17 will turn on whether voters in the nation, which is in a fifth year of recession, accept open- ended austerity to stay in the euro or reject the conditions of a bailout and risk the turmoil of becoming the first to exit the 17-member currency.
Central banks intensified warnings that Europe’s failure to tame its sovereign-debt crisis threatens to roil the world’s financial markets. Monetary policy makers from the U.K. to Japan and Canada sounded the alert about potential fallout. They spoke as Group of 20 leaders prepare to meet in Mexico next week amid the weakest international economy since the 2009 recession
Major central banks are preparing for coordinated action to increase liquidity in financial markets if needed, Reuters reported yesterday, citing officials linked to the G-20.
The U.K. and France each increased their holdings of Treasuries by more than 26 percent in April amid the euro bloc’s crisis. Britain’s holdings rose 26.5 percent to $154.2 billion, while France’s increased 29.4 percent to $59.4 billion, the Treasury Department said today.
China remained the largest international buyer of Treasuries, with its holdings rising $1.5 billion to $1.15 trillion, the data showed.
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