U.S. Debt Set for Weekly Loss on EU Effort to Stem Crisis

Treasuries headed for a weekly loss as European officials took steps to contain the region’s debt crisis and data showed improvement in the U.S. economy.

Federal Reserve Chairman Ben S. Bernanke said yesterday central-bank efforts to spur growth are sending credit markets and shares higher. U.S. government securities have declined 0.5 percent this year, while company debt returned 3.3 percent, Bank of America Merrill Lynch data show.

“Yields are at the top of a range which has been in place since the beginning of November,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “It has in part been some easing of the euro-zone tensions. The better U.S. economic data has pushed well back any expectations” that the Fed will expand it bond-purchase program, he said.

The U.S. 10-year note yielded 2.02 percent at 6:05 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 traded at 99 26/32. Yields climbed four basis points, or 0.04 percentage point, this week, the most since the period ended Feb. 10.

Bernanke defended the U.S. central bank’s expansive monetary policy yesterday, telling a Senate hearing it helped bring jobs and stabilize prices.

“We’ve had about 2.5 million jobs created” since November 2010, Bernanke said, referring to when the Fed started its second round of large-scale securities purchases. “We’ve seen big gains in stock prices, improvement in credit markets.”

Stock Returns

The Standard & Poor’s 500 Index of stocks returned almost 10 percent this year, including reinvested dividends, according to data compiled by Bloomberg. The drop in U.S. government bonds marks a reversal from 2011, when Treasuries returned 9.8 percent and the S&P 500 gained 2.1 percent.

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap long-term borrowing costs under a program due to conclude in June. The central bank plans to purchase as much as $2.25 billion of debt due from February 2036 to February 2042 today.

Euro-area banks tapped the European Central Bank for a record amount of three-year cash on Feb. 29, raising expectations the companies will pump the money into the economy. The Frankfurt-based ECB said it will lend 800 financial institutions 529.5 billion euros ($701 billion) for 1,092 days. European leaders agreed this week to provide capital faster for the planned permanent bailout fund for indebted governments.

Rescue Fund

Euro-area governments might pay the first two annual installments into the 500 billion-euro bailout fund this year and complete the capitalization in 2015, a year ahead of schedule. A decision is expected today.

Investors who are betting on Treasuries say the securities still have appeal as a haven. Demand for the relative safety of U.S. debt is keeping 10-year yield within about 35 basis points of the record low.

The global economy faces “major downside risks” as its recovery is threatened by stresses in the euro area, the International Monetary Fund said in a report yesterday.

Costs in the U.S. economy will stay in check, said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $40.4 billion.

“Investors will focus on deflation,” Nakamura said. “When that happens, yields will start to decline.” Ten-year yields will fall to 1.5 percent by June 30, he said.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.28 percentage points. The decade-long average is 2.14 percentage points.

Inflation Swaps

Five-year inflation swaps, which allow investors to exchange fixed-interest rates for returns equivalent to the consumer price index, were 2.4 percent.

Treasuries fell yesterday as data showed initial jobless claims in the U.S. matched a four-year low. Consumer confidence rose to the highest in a year, industry figures showed Feb. 28. A government report on March 9 will show nonfarm payrolls grew by 206,000 in February, after gaining 243,000 the previous month, according to a Bloomberg News survey.

Western Asset Management Co., which oversees $443.1 billion and is based in Pasadena, California, is recommending emerging-market dollar-denominated corporate bonds.

The securities offer “attractive income and total return potential,” according to a report yesterday on the company’s website. The document didn’t identify the author.

Yields indicate investors have greater demand for securities beyond the government bond market.

The difference between U.S. two-year swap rates and the yield on same maturity Treasuries shrank to as little as 25 basis points today, the least since August.

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.

The 10-year Treasury yield will climb to 2.5 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE