Treasury 5-Year Yields Fall to Record on Europe Crisis

Five-year Treasury note yields fell to a record low as data showed the U.S. economic growth slowing and investor concern Europe’s debt crisis is worsening led to increased demand for the safest assets.

U.S. government debt gained for a fourth consecutive week as yields on Spain’s bonds climbed to record highs relative to German bunds. The pace of economic expansion in the U.S. probably cooled, data next week may show. The Treasury will sell $99 billion of two-, five-and seven-year notes next week.

“Europe remains a big question,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 21 primary dealers required to bid on the securities. “Flight-to-quality bids will remain. We’re pricing in weak growth in the U.S.”

The five-year note yield fell this week five basis points, or 0.05 percentage point, to 0.57 percent, according to Bloomberg Bond Trader prices. It touched 0.5684 percent yesterday, below the previous mark of 0.577 percent set July 16. The benchmark 10-year Treasury yield fell three basis points to 1.46 percent after touching 1.4403 percent on July 16. It set a record low of 1.4387 percent June 1.

The two-year rate fell four basis points 0.2015 percent, the lowest level since Sept. 23.

Spain’s 10-year benchmark bond yields yesterday climbed above the 7 percent threshold for the first time since Prime Minister Mariano Rajoy unveiled his fourth austerity package last week. That’s the level that prompted bailouts for Greece, Ireland and Portugal.

‘Continued Deterioration’

While the U.S. two-year yield has declined 10 basis points since July 3, it remains above rates on two-year German, Austrian, Finnish and Dutch debt, which dropped below zero this month after the European Central Bank said July 5 it would stop paying interest on deposits. Investors also are paying Switzerland, France, Denmark and the European Financial Stability Facility for the right to lend to them by buying their securities.

“We’re focused on the continued deterioration in Europe,” said Scott Graham, head of government-bond trading in Chicago at Bank of Montreal (BMO)’s BMO Capital Markets unit, a primary dealer. “We continue to be the cheapest high-quality assets out there. The auctions are going to come and go.”

The U.S. will sell $35 billion of two-year notes, the same amount of five-year securities and $29 billion of seven-year debt over three days starting July 24, the Treasury said July 19.

Term Premium

The Commerce Department will likely say the pace of growth for the economy slowed to a 1.4 percent annualized pace in the period from April to June when it releases the data July 27, according to the median forecast of 66 economists in a Bloomberg News survey. That would be the slowest growth rate since the 1.3 percent recorded from April to June last year.

The term premium, a model created by the Federal Reserve that includes expectations for interest rates, growth and inflation, showed Treasuries are almost the most expensive ever. The gauge closed yesterday at a negative 0.9612 percent, close to the record negative 0.9617 set on July 10.

The extra yield investors get for buying 10-year Treasuries instead of similar-maturity bunds widened seven basis points this week to 29 basis points. The average over the past year is 14 basis points.

Treasuries returned 2.5 percent in the three months ended July 19, according to Bank of America Merrill Lynch Indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 2.1 percent loss in the same period, including reinvested dividends.

‘Worse Enough’

Fed Chairman Ben S. Bernanke said in July 18 testimony before the House of Representatives that economic activity decelerated during the first half of the year, adding that policy makers are prepared to take further action as needed.

The central bank bought $2.3 trillion in debt in two rounds of so-called quantitative easing, beginning in November 2008, to avert a prolonged decline in prices, or deflation, and to boost the economy from the recession that ended in June 2009.

Bernanke “reiterated that if things got worse” the Fed was ready to act, said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “I don’t think it’s going to get worse enough in the next week to convince them to do something.”

The central bank’s policy-setting Federal Open Market Committee begins a two-day meeting on July 31. At its June 20 meeting, the Fed extended its efforts to lower borrowing costs by increasing the average maturity of the U.S. government debt it holds on its balance sheet by $267 billion to $667 billion through the end of 2012.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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

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