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Treasuries Gain as Signs of Global Slowing Boost Demand

Treasuries rose for the first time in three days amid signs Europe’s deepening debt crisis is weighing on growth in the world’s largest economies, burnishing the allure of U.S. government securities’ relative safety.

Benchmark 10-year note yields dropped the most this week as Philadelphia-area manufacturing unexpectedly slid, more Americans sought jobless benefits and China’s manufacturing probably shrank for an eighth month. Moody’s Investors Service downgraded 15 global banks. Fed Chairman Ben S. Bernanke said yesterday policy makers are prepared to consider additional steps to aid the economy.

“The economy and Europe are still very fragile, and as such we can go lower in Treasury yields,” said James Camp, managing director of fixed income in St. Petersburg, Florida, at Eagle Asset Management Inc., which oversees $21.5 billion. “The fundamentals do not augur for dramatic rate increases for the next few years. We are seeing a recasting of expectations for capital markets.”

Ten-year yields fell four basis points, or 0.04 percentage point, to 1.62 percent as of 5:48 p.m. New York time, Bloomberg Bond Trader prices showed. Yields slid as much as six basis points in the biggest intraday drop since June 15. They increased more than eight basis points over the past two days. The 1.75 percent securities due in May 2022 rose 3/8, or $3.75 per $1,000 face amount, to 101 7/32.

Long Bonds

Yields on 30-year bonds tumbled five basis points to 2.69 percent. They reached a record low 2.51 percent on June 1.

Trading volume shrank. About $269 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, down 15 percent from yesterday’s $317 billion. The average volume over the past year is $255 billion.

Stocks fell as investor appetite ebbed, with the Standard & Poor’s 500 Index dropping 2.2 percent.

Treasuries returned 3 percent from the end of March to yesterday, according to Bank of America Merrill Lynch’s Treasury Master index, amid concern Europe’s debt crisis was worsening and U.S. growth was slowing. The S&P 500 lost 4.1 percent.

Bonds extended gains today after the Fed Bank of Philadelphia’s general economic index fell to negative 16.6 in June from minus 5.8 the previous month. Economists in a Bloomberg News survey forecast the gauge would improve to zero, the dividing line between growth and contraction.

Initial jobless claims totaled 387,000 in the week ended June 16, Labor Department figures showed. The median forecast in a Bloomberg survey called for 383,000. The four-week average, a less volatile measure, climbed to the highest of the year.

“There’s no sign of positive momentum in the labor market,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the U.S. central bank.

Forecasts Lowered

The Fed cut its estimate yesterday for economic growth in 2012 to between 1.9 percent and 2.4 percent, from April forecasts of 2.4 percent to 2.9 percent. It lowered its inflation forecast to 1.2 percent to 1.7 percent this year, down from an April prediction of 1.9 percent to 2 percent.

Policy makers extended through year-end their Operation Twist program of selling shorter-term securities and buying the same amount of longer-term debt to lower borrowing costs. The $400 billion program was scheduled to end in June. The Fed expanded it by $267 billion.

The central bank bought $4.78 billion of Treasuries today due from June 2018 to August 2019 as part of the program.

The difference in yields between 10-year notes and TIPS, which represents traders’ expectations for the rate of inflation over the life of the bonds, narrowed to 2.07 percentage points. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20. The five-year average is 2.02 percentage points.

Moody’s Downgrades

Treasuries remained higher as Moody’s cut credit ratings of Credit Suisse Group AG three levels, and Morgan Stanley and UBS AG two steps. It also downgraded 13 other banks, including Bank of America Corp., Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities” Moody’s Global Banking Managing Director Greg Bauer said today in a statement.

Spain’s banks would need as much as 62 billion euros ($78 billion) in capital to withstand a worst-case economic scenario, according to two consulting firms hired by the government to conduct stress tests on the lenders, Roland Berger Strategy Consultants and Oliver Wyman Ltd.

China Manufacturing

Treasuries gained earlier after a purchasing managers’ index for China’s manufacturing showed a preliminary reading of 48.1 this month, HSBC Holdings Plc and Markit Economics said today, below the 50 level that indicates expansion. That signals an eighth month of contraction, which would match the streak during the global financial crisis in 2008.

Euro-area manufacturing output shrank at the fastest pace in three years in June. A gauge of manufacturing in the 17- nation region fell to 44.8 from 45.1 in May, London-based Markit Economics said today in an initial estimate. That’s the lowest in 36 months.

German Chancellor Angela Merkel said in Berlin yesterday allowing direct sovereign-debt purchases through the euro-area bailout fund “is not up for debate” at present. French President Francois Hollande has championed the idea of using rescue facilities to purchase countries’ bonds as a way to help ease Europe’s debt turmoil.

Worse Coming

“The question is, will the economic picture get worse?” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “You are going to start to see worse economic data. The reality of it is we are at a lower interest-rate level for longer.”

The Treasury said it will auction $99 billion of notes next week: $35 billion of two-year debt on June 26, the same amount of five-year securities the next day and $29 billion of seven- year notes on June 28.

The U.S. sold $7 billion today of 30-year Treasury Inflation Protected Securities at a record low offering yield of 0.52 percent.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.64, versus an average 2.72 at the past six auctions. Indirect bidders, an investor category that includes foreign central banks, bought 34.3 percent of the securities, compared with an average of 40.6 at the past six sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 28.1 percent, versus an average 17.4 percent.

“Demand continues for the asset class even in this uncertain risk-off environment,” said Michael Pond, co-head of interest-rate strategy in New York at the primary dealer Barclays Plc. “Investors are worried about tail risks of inflation. They are worried about what monetary policy could do down the road, and they are so far convinced that the Fed won’t allow deflation to occur.”

To contact the reporter on this story: 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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