Investors should sell the euro to buy dollars and Treasury notes as yields start moving in sync with the currency pair, according to CRT Capital Group LLC.
The 22-day correlation coefficient between euro-dollar and U.S. 10-year yields swung to positive 0.4 today from minus 0.57 on April 6, data compiled by Bloomberg show. A value of one would mean declines in the 16-nation currency perfectly match a drop in U.S. interest rates. The euro fell today to its lowest level in a year against the greenback on concern the Greek debt crisis is spreading through the region.
“Europe’s got its problems,” said David Ader, head of government bond strategy in Stamford, Connecticut, at CRT. He predicts 10-year yields will fall to a low for the year at 3.5 percent.
“We’re going to have a more benign supply story down the road, inflation is clearly not that much of a threat, and we are cheap to Europe,” Ader said.
The Treasury asked bond dealers last month to recommend ways to reduce coupon auction sizes as the economy recovers and the budget-deficit outlook improves.
The yield on U.S. 10-year notes has fallen 39 basis points to 3.62 percent after reaching a five-month high of 4.01 on April 5. That’s the fastest pace of decline since September, Bloomberg data show. The euro slumped 3.8 percent to $1.3022 over the same period.
The rally in Treasuries has compressed yields relative to similar-maturity German debt to 67 basis points from a three-year high of 90 basis points as of the April 5 close. The extra yield received on Treasuries is still more than twice the 10-year average spread of 26 basis points, Bloomberg data show.
“We have a strong currency, we have a wide yield spread,” Ader said. “On a relative basis we have a currency that is doing better, so you could potentially benefit from the dual gains in the currency as well as the falling-to-stable yield situation.”