U.S. 10-Year Note Yield Falls Below 2% on Europe’s Debt

Treasury 10-year yields fell below 2 percent for the first time in almost a one month on speculation the European sovereign-debt crisis is worsening as yields on Spanish and Italian bonds rose.

U.S. debt securities declined earlier on speculation yields that slid to a four-week low will curb demand as investors prepared to bid for $66 billion of notes and bonds at three auctions starting today. The yield on Spain’s 10-year note rose to 5.9 percent, the highest since November. The yield on Italy’s 10-year note reached 5.58 percent, the highest since February.

“Spain is raising the prospect of an additional flight-to-safety rally,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York, which manages $12 billion in bonds.

Yields on 10-year notes fell six basis points, or 0.06 percentage point, to 1.98 percent at 12:36 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 rose 18/32, or $5.63 per $1,000 face amount, to 100 1/8. The yield touched the least since March 8.

The U.S. will sell $32 billion of three-year notes today, $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on April 12. The auctions will raise $23.1 billion of new cash as maturing securities held by the public total $42.9 billion.

The three-year note to be sold today yielded 0.43 percent in pre-auction trading.

Trading Pace

Trading volume was below average yesterday, with about $166 billion of Treasuries changing hands through ICAP Plc, the world’s largest interdealer broker, the lowest for a full-day since March 26. Volume reached $439 billion on March 14, the highest since August. The average in 2012 is $251 billion.

An index of U.S. financial conditions is signaling a slowdown after having crossed over toward indicating growth on March 9.

The Bloomberg U.S. Financial Conditions Index has held below zero since April 6, after the Labor Department said the economy added 120,000 jobs in March, less-than-forecast. The measure fell to minus 0.19 after rising as high as 0.24 on March 19. The index touched minus 12.7 during the financial crisis in October 2008.

U.S. Treasuries investors cut expectations that prices of the securities will drop as the percentage of so-called short positions declined in a weekly survey by JPMorgan Chase & Co.

Investor Sentiment

Net longs rose to 2 percentage points as of yesterday, after longs and shorts were equal last week, according to the survey. Outright shorts dropped to 13 percent from 17 percent in the previous week, while the level of outright longs slipped to 15 percent from 17 percent. A short position is a wager the price of a security will fall, while a long position is a bet it will rise. The percentage of neutrals increased to 72 percent from 66 percent, rising to the highest level since Feb. 13.

The gap between Spanish and German 10-year yields widened to 4.28 percentage points, the most since November, after Spanish Prime Minister Mariano Rajoy’s unexpected announcement yesterday that he would cut an additional 10 billion-euros ($13 billion) in education and health spending failed to ease concern in the bond market that the nation may become the fourth euro member to need a bailout.

The Federal Reserve has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of asset purchases intended to stimulate the economy, known as quantitative easing.

European Issues

“There’s renewed concern about Europe, there’s evidence the economy may be succumbing to higher gasoline prices and a higher expectation of a Fed QE3 operation,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

Crude oil for May delivery rose 45 cents, or 0.4 percent, to $102.91 a barrel on the New York Mercantile Exchange.

The National Federation of Independent Business’s optimism index for U.S. small businesses declined for the first time in seven months to 92.5 from a one-year high of 94.3 in February, the Washington-based group said today in a statement. Nine of the measure’s 10 components fell.

“Economic data has been turning a little softer, and this morning we had the NFIB” survey showing diminished confidence, Deutsche Bank’s Pollack said.

Company leaders may be growing concerned that rising fuel costs will again slow the economic recovery, calling into question whether hiring will pick up after payrolls climbed less than forecast last month. The world’s largest economy added 120,000 jobs in March, the fewest in five months.

The central bank on March 13 reiterated its previous statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has kept its target rate for overnight bank loans to a range of zero to 0.25 percent since December 2008.

The gap between yields on Treasuries maturing in two and 10 years narrowed to 1.69 percentage points, the least since March 7.

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