Treasuries rallied, pushing 10-year note yields to a record low, as a surge in European bank and sovereign-credit risk to all-time highs on speculation Greece may default bolstered the refuge appeal of U.S. government debt.
Benchmark 10-year securities gained for a second week as German Chancellor Angela Merkel’s government prepared plans to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt. Greece rejected default talk as “organized speculation,” according to an e-mailed statement from the finance ministry.
“Fear is driving everything right now,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “People are nervous about Greece defaulting this weekend. That’s why you’re getting this kind of jump in the market.”
Yields on 10-year notes dropped six basis points, or 0.06 percentage point, to 1.92 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 gained 17/32, or $5.31 per $1,000 face amount, to 101 27/32.
The Standard & Poor’s 500 Index tumbled 2.7 percent. The Stoxx Europe 600 Index fell 2.6 percent. Gold futures for December delivery gained 0.2 percent to $1,861.20 an ounce. Prices rose to a record $1,923.70 on Sept. 6.
The 10-year yields had a weekly drop of seven basis points after falling yesterday to 1.8942 percent, the lowest level on record in Federal Reserve data going back to 1953. The yields earlier advanced four basis points to 2.02 percent.
An emergency plan in Germany involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said three people who spoke on condition of anonymity because the deliberations are being held in private.
The successor to the government’s bank-rescue fund introduced in 2008 may be enrolled to help recapitalize the banks, one of the people said.
Credit-default swaps insuring Greek government bonds jumped 701 basis points to a record 3,727 basis points, according to CMA. The five-year contracts signal there’s a 94 percent probability the country won’t meet its debt commitments.
Canadian Finance Minister Jim Flaherty told reporters in Marseille, France, that Greece may have to leave the euro if it fails to press ahead with its budget-cutting plans.
Greece is committed to “full implementation” of its bailout agreement, the nation’s finance ministry said in its statement. The next government bond will mature Dec. 19 and is worth 1.2 billion euros ($1.6 billion), according to Bloomberg data. Until then, Greece faces redemptions on Treasury bills, which are typically rolled over by a group of primary dealers.
Adding to European sovereign-debt turmoil, Juergen Stark resigned from the European Central Bank’s Executive Board. During a Sept. 4 conference call, Stark expressed opposition to a bond-purchase program, which was expanded last month when the ECB started buying Italian and Spanish debt, said a euro-area bank official, who spoke on condition of anonymity because discussions are confidential.
Two-year interest-rate swap spreads, a gauge of fear in the debt markets, rose to the highest since July 2010 as the cost to protect European financial and sovereign debt surged.
The difference, or spread, between the two-year swap rate and the comparable-maturity Treasury note yield climbed as much as 4.4 basis points to 35.61 basis points. The measure has climbed from 23.37 since the end of July.
Obama’s Jobs Plan
In the U.S., President Barack Obama presented to Congress last night in Washington a $447 billion jobs plan that would include infrastructure spending, subsidies to local governments to stem teacher layoffs and cutting in half payroll taxes paid by workers and small-business owners. Tax cuts account for more than half the plan’s dollar value.
“For the first time, the administration recognizes how deep our economic challenges are and is trying to get ahead of them,” Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. The firm manages the biggest bond fund.
Treasuries rallied yesterday as Fed Chairman Ben S. Bernanke said in a speech to economists in Minneapolis that policy makers will discuss what they may need to do to boost the recovery at their meeting this month. The Fed begins a two-day policy meeting on Sept. 20.
Policy makers are prepared to use the tools they have “as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said. He said in previous remarks the options include lengthening the average duration of securities in the Fed’s $1.65 trillion Treasury portfolio and buying more government bonds.
The Fed acquired $3.345 billion of Treasuries maturing from April 2018 to August 2018 today. The purchases are part of the central bank’s policy of reinvesting the proceeds of maturing assets on its balance sheet to keep borrowing costs low and support the economic recovery.
“The growth outlook looks sour, there is no guarantee that anything else comes from the Fed, there is little willingness for more fiscal stimulus from Washington, and Europe is a mess, which make owning Treasuries a good idea, despite these yields,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 20 primary dealers that trade with the Fed.