Treasury yields were three basis points from the record low set yesterday after Moody’s Investors Service cut the rating outlook for Germany, the Netherlands and Luxembourg, driving demand for the relative safety of U.S. debt.
Investors are willing to give up 62 basis points of yield to buy Treasuries instead of government securities in other nations, based Bank of America Merrill Lynch’s U.S. Treasury Master index and Global Sovereign Broad Market Plus index. The difference is the most in almost four weeks. The U.S. plans to sell $99 billion of notes over three days starting with a two- year auction today.
Benchmark 10-year Treasury yields were little changed at 1.43 percent as of 1:30 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due in May 2022 was 102 29/32. The record low rate set yesterday was 1.3960 percent.
“I don’t expect Treasury yields to go up unless we see some positive news from Europe,” said Hajime Nagata, who helps oversee the equivalent of $124 billion as an investor in Tokyo at Diam Co. Nagata said he added to his holdings about a month ago when yields were 1.65 percent and plans to keep his bet on U.S. debt.
Moody’s cited risks that Greece may leave the 17-nation euro bloc and the “increasing likelihood” of collective support for European countries such as Spain and Italy for yesterday’s changes to the ratings outlook for Germany, the Netherlands and Luxembourg.
Spain’s bonds tumbled yesterday on speculation other regions will follow Valencia in asking for financial aid, increasing the odds the country will need a sovereign bailout. Ten-year yields rose as high as 7.565 percent, the most since November 1996.
Demand for Treasuries pushed yields on U.S. five-, 10- and 30-year debt to record lows yesterday. Five-year notes yielded as little as 54 basis points, or 0.54 percent.
U.S. government securities returned 2.8 percent in the three months ended yesterday, according to Bank of America Merrill Lynch indexes, as Europe’s debt crisis drove investors to the safest securities. The MSCI All-Country World Index of stocks fell 3.9 percent in the period, including reinvested dividends.
The 14-day relative strength index for two-year U.S. government bonds was 30.9, near the 30 level that some traders see as an indication that an asset may reverse direction. The figure dropped to as low as 26.4 last week. The two-year yield declined to 0.19 percent yesterday, the least since September 2011.
The Federal Reserve plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of a program known as Operation Twist. The central bank is swapping short-term Treasuries in its holdings for longer maturities to support the economy by putting downward pressure on long-term borrowing costs.
Fed Governor Sarah Bloom Raskin said yesterday U.S. policy makers will debate at a meeting next week whether to start another program to spur growth through large-scale Fed purchases of bonds.
The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to cap borrowing costs and stimulate the economy.
Ten-year yields will climb to 2.5 percent by Dec. 31, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets.
“Treasury yields are so much lower than what the U.S. economic situation suggests,” he said. “The housing market recovery is much stronger than expected.”
Sales of new homes may have risen to a 371,000 annual pace in June, the most since April 2010, according to economist forecasts in a Bloomberg News survey before figures from the Commerce Department tomorrow.
While U.S. economic growth is limited, it would be an “overreaction” to suggest it is headed for a recession, according to Bob Doll, who serves as an adviser to BlackRock Inc. (BLK), the world’s biggest money manager which oversees about $3.6 trillion. Doll, who was the company’s former chief equity strategist for fundamental equities, commented yesterday on BlackRock’s website.
The Treasury Department is selling $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year bonds on July 26.
Two-year notes yielded 0.215 percent in pre-auction trading, versus 0.313 percent the last time the notes were sold on June 26. Investors submitted orders for 3.62 times the amount of available debt last month. The average over for the past 10 sales is 3.72.
Direct bidders, non-primary dealers buying for their own accounts, purchased 7.9 percent of the securities. Indirect bidders, which include foreign central banks, bought 31.7 percent of the debt, the least since December.
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