Treasuries Reverse Advance as Higher-Yielding Assets Stabilize

The yield on the 30-year bond fell 3 basis points
The U.S. Department of the Treasury seal. Photographer: Andrew Harrer/Bloomberg

Treasuries reversed a rally that pushed yields on 10-year notes to a one-year low, as a global slide in stocks stabilized and the euro gained, reducing the refuge appeal of U.S. government securities.

U.S. bonds gained for the week, with 30-year yields touching the lowest level in seven months, as European finance ministers met for talks to stem a debt crisis that sent the euro to a four-year low and spurred an exodus from riskier assets.

“Equities have spun around as stock and bond moves were too far, too fast, given the backdrop,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities, an interdealer broker. “Levels are less important today. More important is the needs of the market for fixed income. Most of those needs were met over the last 48 hours, especially this morning, so we are backing off some.”

The yield on the 10-year note rose 1 basis point, or 0.01 percentage point, to 3.23 percent at 4:18 p.m. in New York, according to BGCantor Market Data. For the week, it tumbled 23 basis points. The 3.5 percent security maturing in May 2020 fell 3/32, or 94 cents per $1,000 face amount, to 102 9/32.

Ten-year yields, a benchmark for consumer and company borrowing costs, earlier plunged to 3.10 percent, the least since May 18, 2009. The yield on the 30-year bond increased 1 basis point to 4.10 percent after touching 3.98 percent, the lowest since October. For the week, it dropped 24 basis points.

Stocks Gain

The Standard & Poor’s 500 Index rose 1.5 percent after falling earlier as much as 1.5 percent. It tumbled for the prior three days. The euro strengthened 0.7 percent to $1.2571. It touched $1.2144 on May 19, its weakest since 2006.

“We’ve had a massive flight to quality, and there is speculation that fears from the euro zone may be a bit overblown,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. ‘Looking at the longer term economic impact of the problem in Europe shows that there is an increased risk of a worldwide double-dip recession.”

Europe’s sovereign-debt crisis triggered a surge in demand for the safety of U.S. government securities. A survey published by Barclays Capital Japan Ltd. showed the proportion of institutional investors favoring European bonds over U.S. Treasuries fell to the least since August 2007.

The 18 primary dealers that trade with the Federal Reserve reported the highest volume of trading in Treasuries since October 2008, after the collapse of Lehman Brothers Holdings Inc., for the week ended May 12, the latest data. The average volume was $679.7 billion.

Biggest Return

Treasuries due in 10 years and longer returned 8 percent in the past month after accounting for gains in the dollar, according to data compiled by Bloomberg. That’s the most of 174 bond indexes around the world.

Volatility in the Treasury market surged over the past week, Bank of America Merrill Lynch’s Move index shows. The gauge rose to 110.9 yesterday, approaching this year’s high of 116.7 set May 6. The index measures price swings in Treasuries based on over-the-counter options maturing in two to 30 years.

European Union finance ministers pledged today at a meeting in Brussels to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts. It was their fifth meeting in five weeks in an effort to forge a united response to the debt crisis. They have committed almost $1 trillion to a rescue package to halt the crisis.

‘Serious Consequences’

Fed Governor Daniel Tarullo said the debt crisis may pose a threat to the world economy.

Further contraction in Europe “associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Tarullo said yesterday in testimony to House Financial Services subcommittees.

The flight-to-quality trade may reverse as the EU’s rescue package breaks the spiral of rising bond yields while the euro falls, Citigroup Inc. said.

“The combination of a weaker currency and lower yields is a very welcome boost to the economy and dramatically increases the likelihood that the fiscal woes can be contained within the weaker peripheral countries,” Mark Schofield, head of interest- rate strategy at Citigroup in London, wrote in an investor note dated yesterday.

Consumer Prices Fall

Traders cut bets on inflation this week after the Labor Department reported May 19 U.S. consumer price index fell 0.1 percent in April from March, the first drop in more than a year. The gap between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of traders’ outlook for inflation, touched 1.83 percentage points today, a seven-month low, before paring the decline to 1.95 percentage points.

The yield difference between 2- and 10-year notes narrowed for a fourth straight day, touching 2.41 percentage points, from 2.72 percentage points a week ago.

“There is flight to quality because of what’s going on in Europe, but with inflation prospects low and the Fed on hold for longer than expected, we’re seeing people moving out the curve and buying longer-duration Treasuries,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, another primary dealer.

Treasuries returned 1.97 percent this month, the Bank of America Merrill Lynch Treasury Master index shows.

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