Treasuries Head for Weekly Gain as Europe Drives Safety Bid

Treasuries headed for a weekly gain as the failure of European leaders to end the region’s debt crisis increased demand for the relative safety of American fixed-income securities.

U.S. five-year swap spreads widened to 47 basis points yesterday, the most since August 2009, as investors favor government bonds over higher-yielding contracts and securities. Swap spreads are headed “up and away” because Europe is becoming a risk to U.S. lenders, Bank of America Merrill Lynch said in a report.

“Treasury yields show there is still a flight to quality,” said Chungkeun Oh, a fixed-income trader in Seoul at Industrial Bank of Korea, South Korea’s largest lender to small and medium-sized companies. “Everybody is looking for some decisive action out of Europe, but so far we haven’t seen it.”

Ten-year rates held at 1.95 percent at 8:20 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 changed hands at 100 14/32. The yield declined 10 basis points this week.

U.S. government bonds gained yesterday as borrowing costs jumped at Spanish and French bond sales. Investors questioning whether European nations can pay their debts have driven yields up, bringing down governments in Greece and Italy and threatening the survival of the euro.

Wider Spreads

Ten-year swap spreads have increased to 19 basis points, or 0.19 percentage point, from this year’s low of five basis points in January. Investors use swaps to exchange fixed and floating interest rates. The spread, the gap between the fixed component and the yield on similar-maturity Treasuries, is a measure of bank creditworthiness.

The figure may climb to 35 basis points, Bank of America, one of the 21 primary dealers that underwrite the U.S. debt, said in a report yesterday by Jabaz Mathai, Bin Gao and Adarsh Sinha.

The three-month London interbank offered rate has climbed to a 15-month high of 0.479 percent, according to the British Bankers’ Association.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 48 basis points, the most since June 2010. The spread was as much as 464 basis points in October 2008 when credit markets froze and the U.S. economy was in a recession.

Stocks Slide

The MSCI All Country World Index of stocks slid 8 percent in 2011 after accounting for reinvested dividends, according to data compiled by Bloomberg.

Treasuries have returned 9.2 percent this year as of yesterday, according to Bank of America figures. German bunds advanced 8.4 percent and Japanese government securities handed investors a 2.1 percent gain.

The Federal Reserve is scheduled to buy as much as $2.75 billion of Treasuries due from 2036 to 2041 today as part of a plan announced in September to replace $400 billion in shorter maturities with longer-term debt to cap borrowing costs.

Ten-year yields that are about 30 basis points away from their record low are unattractive to some investors as the economy expands, according to CIBC World Markets Japan Inc. An industry report today will show an index of leading economic indicators rose 0.6 percent in October, the most in three months, based on Bloomberg News surveys of economists.

Not Good Value

“I don’t see that Treasuries offer good value,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World, a unit of Canada’s fifth-largest lender. The U.S. economy “is not too bad.” Oh’e said his customers are telling him yields are too low and they have no plans to buy.

The 10-year rate will advance to 2.43 percent by the middle of 2012, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. An investor who bought today would lose 2.7 percent if the forecast is correct, Bloomberg data show.

Ten-year notes yield negative 1.57 percent after accounting for costs in the economy.

Investors cut bets on inflation as the Labor Department said this week that annual gains in consumer prices slowed to 3.5 percent in October from 3.9 percent in September.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has narrowed to 1.92 percentage points from 2.09 percentage points on Nov. 11. This year’s average is 2.26 percentage points.

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