Treasuries Rise 6th Day on Europe Concern, Slowdown Signs

Treasuries rose for a sixth day as European leaders clashed on ways to curb the region’s debt crisis and economists said data on durable-goods orders and consumer spending this week will show a sluggish U.S. recovery.

Ten-year notes extended their daily rally to the longest in more than a year after German Chancellor Angela Merkel and French President Francois Hollande disagreed over the weekend on a timetable to introduce joint oversight of the region’s banking sector. U.S. investors are buying Treasuries at a faster pace than foreigners for the first time since 2010, government figures show. The U.S. will sell $99 billion in notes this week.

“It’s a combination of slower U.S. growth expectations coupled with the ongoing European saga and its implications for global financial markets,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “All of this has created a bullish underpinning for the Treasury market.”

The benchmark 10-year yield dropped four basis points, or 0.04 percentage point, to 1.71 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.70 percent, the lowest since Sept. 12. The price of the 1.625 percent note due in August 2022 rose 3/8, or $3.75 per $1,000 face amount, to 99 7/32. The six-day rally is the longest since the period ending May 6, 2011.

Thirty-year bond yields decreased five basis points to 2.90 percent, falling below their 200-day moving average of 2.94 percent. They touched 3.12 percent Sept. 17, a four-month high.

Volume Drops

About $165 billion in Treasuries changed hands today through ICAP Plc, the world’s largest interdealer broker, the lowest amount since Aug. 27. Daily volume reached $464 billion on Sept. 13, the most since August 2011, and has averaged $241 billion this year.

Treasury one-month bill rates fell to 0.005 percent, matching the low on Aug. 6. They touched a 2012 high of 0.122 percent on Aug. 29 and a low for the year of negative 0.01 percent on Jan. 3. The 10-year average is 1.61 percent.

U.S. government securities were at the most expensive level in two weeks. The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.91 percent, the most costly since Sept. 10. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.74 percent.

‘Risk-Off’

“The news out of Europe has brought in better buying for the risk-off trade,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

Germany’s Ifo institute said its business-climate index, based on a survey of 7,000 executives, dropped to 101.4 from 102.3 in August. That’s the lowest reading since February 2010.

Spanish Prime Minister Mariano Rajoy must decide whether his nation needs a full rescue, Michael Meister, chief whip and finance spokesman for Merkel’s Christian Democratic Union, said in an interview in Berlin. Rajoy has shown reluctance to seek a bailout after the European Central Bank unveiled a bond-purchase plan, linked to conditions for recipient states, on Sept. 6.

Merkel rebuffed Hollande’s appeal this weekend for joint oversight of euro region banking “the earlier, the better.”

“As bad as things have been here, they are much worse in Europe,” said Michael Cloherty, head of U.S. interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in New York, one of 21 primary dealers that with the Fed, in an interview on Bloomberg Radio with Tom Keene and Ken Prewitt. “While yields here are still very low, there’s still this safety bid around the world.”

‘Roughly Sideways’

Ten-year note yields will “chop around roughly sideways between 1.60 and 1.85 percent,” Cloherty said.

Deutsche Bank AG expects the 10-year yield will rise to as high as 2 percent by year-end, according to a note by analysts led by Dominic Konstam, global head of interest-rates research in New York at the firm, a primary dealer.

“The market is priced for the worst in Europe, the U.S. fiscal situation and growth, but Europe is resolving itself slowly, the worst of the fiscal situation is already priced and central banks are catching up in their fight against the global slowdown,” Konstam said in a telephone interview. “There is a lot of pessimism around, but it’s clear that the risk-on trade is the right trade and that Treasuries will lose some of their safe-haven appeal.”

Ten-year yields will increase to 1.79 percent by Dec. 31, according to the average forecast in a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings.

Durable Goods

U.S. durable-goods orders, a measure of demand for equipment and machinery, dropped 5 percent in August after rising 4.1 percent the previous month, according to a Bloomberg News survey before the Sept. 27 report from the Commerce Department. Household purchases gained 0.5 percent last month after a 0.4 percent increase in July, a separate survey showed before the figures are released on Sept. 28.

A gauge of traders’ outlook for consumer-price increases declined to the lowest since its closing the day before the Fed announced its latest stimulus efforts. The gap in yield between 10-year notes and similar-maturity Treasury Inflation Protected Securities, known as the break-even rate, narrowed to 2.45 percentage points today, the lowest since its Sept. 12 close. It touched 2.73 percentage points on Sept. 17, the most since May 2006. The gap has averaged 2.21 percentage points this year.

Note Auctions

The Treasury is scheduled to sell $35 billion of two-year notes tomorrow, the same amount of five-year debt the next day and $29 billion of seven-year securities Sept. 27.

“The market would like to see a little bit of a concession going into the auctions,” Rogan of Guggenheim said. “You’ll see pretty good demand.”

Treasuries returned 1.7 percent this year as of Sept. 21, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index gained 28 percent, including reinvested dividends, according to data compiled by Bloomberg.

The Fed said on Sept. 13 it will buy $40 billion of mortgage-backed bonds a month to put downward pressure on borrowing costs until the economic recovery is well established.

U.S. policy makers pledged to keep their target interest rate for overnight loans between banks at virtually zero until at least the middle of 2015.

The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years to cap borrowing costs. It purchased $1.8 billion of debt today maturing from February 2036 to May 2042 as part of the program, according to Fed Bank of New York’s website.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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