U.S. 2-Year Swap Rate Narrows to Least in Month on Credit Surge

U.S. two-year swap spreads narrowed to the least in a month after a Federal Reserve report showed consumer credit surged by the most in 10 years, signaling households are more willing to borrow and spend.

Treasuries, which were little changed today, have failed to extend 2011’s rally as the world’s biggest economy shows signs of improving. Benchmark 10-year yields were still within 30 basis points of the record low, reflecting demand for the relative safety of America’s debt during the European fiscal crisis. The U.S. is scheduled to auction $32 billion of three-year notes today, after a sale of the securities last month drew record bidding.

“The flight to quality continues, and that is keeping yields low,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “It’s difficult to say when yields will rise, but the time is getting near because the U.S. economy is expanding.”

Ten-year rates rose one basis point to 1.97 percent as of 10:45 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 declined 3/32, or 94 cents per $1,000 face amount, to 100 1/4. The yield slid to 1.67 percent on Sept. 23, the least ever.

Narrower Spread

The difference between two-year swap rates and the yield on same maturity Treasuries shrank to 39 basis points today, the least since Dec. 8.

Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets versus sovereign debt.

Japan’s 10-year rate held at 0.98 percent, declining from 1.2 percent a year ago.

U.S. consumer credit increased by $20.4 billion in November, the most since November 2001, Fed figures showed yesterday in Washington. The unemployment rate fell to 8.5 percent last month, the least since February 2009, the Labor Department reported Jan. 6.

Treasuries have handed investors a 0.3 percent loss in January, according to Bank of America Merrill Lynch indexes. U.S. company bonds have returned 0.2 percent, and Treasury Inflation Protected Securities gained 0.6 percent, the figures show.

The MSCI All Country World Index of stocks has returned 1.3 this year including reinvested dividends, according to data compiled by Bloomberg.

Rally Halted

The figures mark a reversal from 2011, when Treasuries surged 9.8 percent for their biggest rally in three years while the MSCI index slid 6.9 percent.

Treasuries fluctuated yesterday amid skepticism that Europe’s debt crisis will be resolved after the leaders of Germany and France said rules for closer fiscal union among the euro-area nations may be ready a month early.

The three-year notes scheduled for sale today yielded 0.38 percent in pre-auction trading. The record low auction rate was 0.334 percent set in September. The prior sale of the securities last month drew a yield of 0.352 percent, with investors submitting bids for an unprecedented 3.62 times the amount of debt offered for this maturity.

The U.S. is also scheduled to sell $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Jan. 12.