Treasuries Gain a Third Day on Bets Europe Crisis to Damp Growth

Treasuries rose for a third day, pushing benchmark 10-year note yields to within a quarter-percentage point of a record low, on concern Europe’s debt crisis will curb global growth.

Thirty-year bond yields reached a one-week low as the euro fell to the weakest level in 15 months versus the dollar while Italian bond yields advanced. Italy sold less than its maximum target at a debt auction, highlighting funding problems in the region. Treasuries fell earlier as data signaled the U.S. economy is strengthening.

“The reason yields are this low is largely because of Europe,” said Anthony Cronin, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Federal Reserve. “The U.S. economy seems to be fine, but the big uncertainty looking ahead is if the situation over there deteriorates.”

Ten-year note yields decreased two basis points, or 0.02 percentage point, to 1.90 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They advanced earlier to 1.94 percent. The 2 percent securities maturing in November 2021 rose 5/32, or $1.56 per $1,000 face amount, to 100 29/32. The yields dropped to a record low 1.67 percent on Sept. 23.

Thirty-year bond yields fell two basis points to 2.90 percent after rising earlier as much as two basis points to 2.94 percent. They touched 2.89 percent, the lowest since Dec. 20.

Lower Volumes

Treasury market volumes have slid amid the Christmas and New Year’s holiday season. About $109 billion of Treasuries changed hands today through ICAP Plc, the world’s largest interdealer broker. About $90 billion changed hands on Dec. 23. The 2011 daily average is $286 billion.

U.S. government securities have returned 9.6 percent this year, according to Bank of America Merrill Lynch’s Treasury Master index, as Europe’s debt crisis led investors to seek refuge. The gain is Treasuries’ biggest since the depths of the financial crisis in 2008. German government bonds have returned 9.3 percent. The MSCI World Index of stocks dropped 5.5 percent this year after accounting for reinvested dividends.

Bonds declined earlier as U.S. jobless-benefit applications over the past month fell to a three-year low. The four-week moving average for the claims, a less volatile measure than the figures reported weekly, dropped to 375,000 last week, the lowest level since June 2008, Labor Department data showed today in Washington. Applications in the week ended Dec. 24 rose for the first time in a month, climbing by a more-than-forecast 15,000 to 381,000.

Business Gauge

The Institute for Supply Management-Chicago Inc. said today its business barometer was at 62.5 this month, from 62.6 in November. Readings above 50 signal growth. Economists had forecast the gauge would fall to 61, according to the median in a Bloomberg News survey. The National Association of Realtors’ index of pending home sales increased 7.3 percent to the highest level since April 2010.

The yield gap between U.S. conventional 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 1.97 percentage points, from 1.99 percentage points yesterday. The 10-year average for the measure, known as the break-even rate, is 2.13 percentage points.

The difference between yields on two- and 30-year Treasuries, known as the yield curve, shrank for a third day. It contracted to 2.64 percentage points, the least since Dec. 19. The average in 2011 is 3.47 percentage points, with the low of the year, 2.49, reached on Oct. 3.

Emerging Markets

Treasuries extended gains today amid speculation expansion in emerging markets is slipping.

Some investors are trimming their forecasts for global growth as “the outlooks for some of the emerging markets are a bit less certain than the performance suggested in 2011,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “They’ve clearly been a bright spot in the global growth profile.”

Growth will slow in Brazil to 3.4 percent in 2012 from 7.6 percent in 2010, while China’s expansion cools to 8.5 percent in 2012 from 10.4 percent in 2010, according to Bloomberg surveys.

Treasuries rallied yesterday after the European Central Bank said its balance sheet soared to a record following last week’s lending to keep credit flowing in the region.

Italian Bonds

Benchmark Italian 10-year bond yields rose above 7 percent today, the level that spurred Greece, Portugal and Ireland to seek bailouts, after the nation’s auction of 7.02 billion euros ($9 billion) of debt fell short of the 8.5 billion-euro target. Yields fell from the previous auctions. Yesterday, Italy sold 9 billion euros of 179-day bills at 3.251 percent, down from 6.504 percent at the previous auction on Nov. 25.

The euro dropped today to as low as $1.2858, the weakest level against the greenback since September 2010, before erasing losses.

The 17-country currency is the worst performer this year against nine developed-nation counterparts measured by Bloomberg Correlation-Weighted Currency Indexes, losing 1.7 percent as European leaders have failed to contain the region’s two-year-old debt crisis. The dollar gained 1.5 percent, second only to the yen’s 4.8 percent increase.

“The world is still not all that interested in owning European bank debt, European government debt, and that means de-risking,” said Tony Crescenzi, a portfolio manager and strategist at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s biggest bond fund. Crescenzi spoke in an interview on Bloomberg Radio. “The world right now wants to see more from European leaders than they’ve seen so far.”

The U.S. 10-year yield will increase to 2.67 percent by the end of 2012, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.

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