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Treasuries Rise Second Consecutive Week on Refuge Demand

Treasuries gained for a second straight week as European leaders struggled to resolve the region’s debt crisis and reports suggested slower U.S. growth, sustaining the appeal of the world’s safest assets.

Benchmark 10-year notes pared gains after a stress test showed Spanish banks’ capital shortfall is less than some traders speculated. Yields dropped to three-week lows earlier as American consumer spending and personal incomes stagnated. U.S. government securities returned 0.6 percent this quarter, after gaining 3 percent in the prior three months, Bank of America Merrill Lynch indexes show.

“The sovereign debt crisis and concern that global growth is waning are propelling Treasuries,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

The 10-year note yield declined two basis points, or 0.02 percentage point, to 1.63 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, after falling earlier to as low as 1.60 percent, the least since Sept. 7. It dropped 12 basis points this week. The price of the 1.625 percent note maturing in August 2022 increased 6/32, or $1.88 per $1,000 face amount, to 99 29/32.

Thirty-year bond yields fell two basis points to 2.82 percent. The long-bond yields reached 2.78 percent earlier. They decreased 12 basis points on the week.

Volume Rises

Treasury volume reported today in New York by ICAP Plc, the largest interdealer broker of U.S. government debt, rose to $315 billion, from $298 billion yesterday. Daily volume has averaged $242 billion in 2012. It touched $464 billion Sept. 13, the highest in 13 months.

Ten-year note yields rose from a three-week low as an independent test showed Spanish banks have a combined capital shortfall of 59.3 billion euros ($76.3 billion). The examination was a condition Spain accepted in July for a 100 billion-euro rescue of its banking system.

“It’s the realization that it wasn’t as bad as expected,” Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, said of the bank data. “There were early rumors circulating that it could be as much as 150 billion euros.”

Treasuries rose earlier as Commerce Department data showed personal spending barely rose in August after adjusting for inflation. Household purchases increased 0.5 percent, mainly reflecting a 0.4 percent jump in prices, leaving so-called real spending up 0.1 percent. Personal incomes rose 0.1 percent in August, department figures showed, matching the previous month’s gain after the department revised down those figures.

Business Barometer

Business activity in the U.S. unexpectedly contracted in September for the first time in three years, adding to signs manufacturing will contribute less to the economic recovery. The Institute for Supply Management-Chicago Inc. said its business barometer fell to 49.7 this month from 53 in August. A reading of 50 is the dividing line between expansion and contraction. A Bloomberg survey forecast a decline to 52.8.

The Federal Reserve said Sept. 13 it will buy $40 billion of mortgage-based securities a month to spur growth.

“The economic data is weak, and the Fed is going to continue to purchase whatever they need to,” said Brian Edmonds in New York, head of interest rates at Cantor Fitzgerald LP, one of the 21 primary dealers that trade with the U.S. central bank.

In another program, the central bank purchased $1.8 billion in Treasuries today due from February 2036 to August 2042 as part of an effort to swap shorter-term Treasuries in its holdings with those maturing in six to 30 years to lower borrowing costs and boost economic growth.

Spain Optimism

Bonds fell yesterday for the first time in nine days, snapping their longest rally in almost four years, as optimism that Spain is moving closer to meeting budget-deficit targets curbed the refuge appeal of U.S. government debt.

Spanish Prime Minister Mariano Rajoy’s cabinet approved a tax on lottery winnings and a cut in ministries’ spending to shrink the euro area’s third-biggest budget deficit. Demonstrators in Spain and Greece protesting budget cuts clashed with police this week.

Treasury gains slowed this quarter from last as investors sought higher rates than those available from government debt.

For all of 2012, Treasuries returned 2.3 percent as of yesterday, while bonds in an index of U.S. investment-grade and high-yield company debt gained 9.5 percent, the Bank of America indexes show. The MSCI All-Country World Index (MXWD) of shares gained 14 percent in the period, including reinvested dividends.

Treasuries were also supported this week as some investors bought debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays Plc U.S. Treasury Index. Duration measures price sensitivity to changes in yield, and is partly a function of maturity.

The Barclays index shows estimated duration forecast to extend by 0.02 years for September, compared with 0.08 years at the end of August, according to the firm, a primary dealer.

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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