March 6 (Bloomberg) -- U.S. 10-year note yields fell the most in more than three weeks as Europe’s economy shrank and investors weighed Greece’s chances of persuading creditors to agree to a bond swap under its private-sector-involvement plan.
Treasuries rallied as investors sought to minimize risk as the debt-swap deadline loomed and before a report that may show the U.S. economy added more than 200,000 jobs for the third straight month. Stocks tumbled.
“They’re trying to discount the uncertainty,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of the 21 primary dealers that trade with the Federal Reserve. “The market’s already anticipating participation in PSI may fall short of what Greece may need.”
Yields on 10-year notes decreased seven basis points, or 0.07 percentage point, to 1.94 percent at 5:20 p.m. New York time, according to Bloomberg Bond Trader prices. They fell as much as eight basis points, the biggest intraday drop since Feb. 10, and reached 1.93 percent, the lowest level since Feb. 29. The price of the 2 percent securities maturing in February 2022 gained 19/32, or $5.94 per $1,000 face amount, to 100 1/2.
U.S. 10-year yields have traded between 1.89 percent and 2.08 percent over the past three weeks.
Yields on 30-year bonds dropped eight basis points to 3.07 percent and touched 3.06 percent, also the lowest since Feb. 29. Two-year note yields declined two basis points to 0.28 percent.
Treasury market volume increased for a second day. About $236 billion of Treasuries changed hands as of 5:01 p.m. through ICAP Plc, the world’s largest interdealer broker, compared with $194 billion on March 2 and a one-year average of $271 billion.
The Standard & Poor’s 500 Index slid 1.5 percent, its biggest drop since December, after climbing last week to the highest level since 2008. The MSCI World Index tumbled 2.1 percent, its largest decline since November.
U.S. 10-year note yields are about 30 basis points from a record low 1.67 percent reached on Sept. 23 as European officials struggle to put an end to the debt crisis that has roiled financial markets for more than two years.
Treasuries gained as the European Union’s statistics office said the 17-nation euro-area economy shrank 0.3 percent in the fourth quarter, matching the forecast in a Bloomberg survey.
The Greek government, which set a 75 percent participation rate as a threshold for proceeding with the debt deal with private-sector investors, said it will use collective action clauses to compel holders of Greek-law bonds to accept the swap if it receives sufficient consents from investors. The goal of the exchange, which runs through March 8, is to reduce by 53.5 percent the total of privately held Greek debt, helping avert an uncontrolled default.
‘Focused on Greece’
“Everyone’s still focused on Greece,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s a reflection of the ongoing uncertainty related to the process.”
U.S. payrolls increased by 210,000 last month after rising by 243,000 in January, the most in nine months, and 203,000 in December, according to economists surveyed by Bloomberg News before the Labor Department’s report on March 9.
Economic growth in the nation will quicken to 2.2 percent in 2012 from 1.7 percent in 2011, Bloomberg News surveys showed. The euro-area economy will shrink 0.4 percent, they showed.
The U.S. economy grew at an annualized 3 percent rate in the last three months of 2011, the fastest since the second quarter of 2010, the Commerce Department reported on Feb. 29.
“Growth expectations are coming back down, even though the U.S. put in a fairly good performance last quarter,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York.
The Fed bought $4.03 billion of Treasuries today due from May 2018 to November 2019, according to the Fed Bank of New York website. The central bank is in the process of swapping $400 billion of shorter-maturity Treasuries in its holdings with longer-term bonds to cap borrowing costs. The program is known by traders as Operation Twist after a similar plan in the 1960s.
The outstanding amount of zero-coupon U.S. Treasury notes and bonds fell for a seventh straight month in February, the longest stretch of declines since 2009, as Operation Twist soaked up securities.
Zero-coupon debt, or strips, short for separate trading of registered interest and principal securities, is created by Wall Street firms that split bonds into their face amount and individual coupon payments. The amount of strips fell by $65.5 million to $195.1 billion last month, Treasury data show. Strips reached a more-than 10-year high of $207.5 billion in July.
Fed ‘Driving Action’
“Customer activity level has ground to a halt as the Fed has really been driving action in the market because of Operation Twist,” said Charles Parkhurst, a strips trader and managing director on the government-bond trading desk in New York at the primary dealer Barclays Plc.
The Fed seeks out the cheapest securities for purchase, which also happen to be the securities that most often get stripped, Parkhurst said.
The yield gap between two- and 30-year U.S. securities, called the yield curve, was 2.80 percentage points, compared with a one-year average of 3.28 percentage points. A flatter curve generally signals a more bearish outlook on the economy.
Yields indicate investors cut bets on inflation over the past week. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, narrowed to 2.18 percentage points, from 2.27 percentage points on Feb. 28.
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