Treasuries Advance on European Debt Crisis, U.S. Slowdown

Treasury 10-year yields were within four basis points of an eight-week low as Europe’s fiscal crisis and forecasts for slowing U.S. economic growth spurred demand for the safest securities.

Ten-year notes rose earlier as the Federal Reserve prepares to start a two-day meeting, with Chairman Ben S. Bernanke scheduled to hold a press conference tomorrow. Bernanke said March 26 that continued accommodative monetary policy is needed to bring down unemployment. The U.S. plans to sell $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year securities on April 26.

“Treasuries are the safe-haven of choice in the current environment,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “Yields are close to two-month lows, so we are wandering into the area where the risk-reward starts to become rather pernicious. It’s an important period in terms of market perception, both about the U.S. economy and what the Fed does next.”

The benchmark 10-year yield was little changed at 1.95 percent at 10:24 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2022 traded at 100 14/32. The yield dropped to 1.91 percent yesterday, the lowest since Feb. 28. It fell to a record 1.67 percent on Sept. 23.

Ostwald said the yield’s decline below 1.96 percent yesterday puts “1.85 percent in focus.”

French Elections

French President Nicolas Sarkozy lost the first round of his re-election bid, and he faces a runoff against Socialist Party challenger Francois Hollande on May 6. Hollande said yesterday a victory by his party would “be the end of imposing austerity everywhere, austerity that brought desperation to people throughout Europe.”

A revolt against spending cuts in the Netherlands led Prime Minister Mark Rutte to offer to quit.

Treasury yields “are headed lower,” said Ali Jalai, who trades Treasuries in Singapore at Scotiabank, a unit of Bank of Nova Scotia, one of the 21 primary dealers that underwrite the U.S. debt. “The economy is just chugging along. It’s not accelerating. Problems in Europe are going to be around for a long time.”

Jalai said he favors five- and seven-year notes because they offer a higher yield than shorter maturities. He said he’d be more bullish on 30-year bonds if inflation slows.

Seven-year Treasuries yield 1.08 percentage points more than two-year debt. Demand for the longer-term note has narrowed the spread from this year’s high based on closing prices of 1.38 percentage points in March. Thirty-year bonds are among the most sensitive to inflation because of their long maturity.


U.S. gross domestic product expanded at a 2.5 percent annual rate in the first quarter, according to the median forecast of economists surveyed by Bloomberg News before the Commerce Department report on April 27. Growth was 3 percent in the previous three-month period.

Commerce Department figures tomorrow will show durable goods orders declined 1.7 percent in March, after rising 2.4 percent in February, according to a separate Bloomberg survey. New home sales rose in March, another survey showed before the government releases the data today.

Higher Yields

Ten-year yields may rise to 3 percent by year-end, according to at Daiwa SB Investments Ltd., which oversees the equivalent of $61 billion, including Asia’s second-largest mutual fund. Bonds with yields less than 2 percent appear “a bit expensive,” said Kei Katayama, who invests in U.S. debt for the company in Tokyo.

Ten-year yields may be in a range of 2 percent to 2.5 percent with the potential to rise to 2.75 percent in 2012, according to Charles Schwab Corp., which is based in San Francisco and manages $199 billion.

“We don’t anticipate that the Fed will change policy this year and it seems unlikely at this juncture that they will engage in more quantitative easing,” Kathy A. Jones, a fixed-income strategist at the company, wrote in an e-mail.

The central bank is scheduled to buy as much as $5 billion of Treasuries due from April 2018 to February 2020 today, according to the New York Fed’s website. The purchases are part of the bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.

Fed Buying

U.S. central bankers bought $2.3 trillion of bonds in two rounds of so-called quantitative easing known as QE1 and QE2. They’ve also said they will probably keep their target for overnight lending between banks at almost zero at least until late 2014.

The two-year notes being sold today yielded 0.27 percent in pre-auction trading, compared with 0.34 percent at the previous sale of the securities on March 27, the highest since July. Investors bid for 3.69 times the debt on offer last month, up from 3.54 times in February.

The two-year yield fell to 0.254 percent yesterday, the lowest since Feb. 10.

The yield is below the 200-day moving average of 0.2628 percent and may encounter resistance at 0.25 percent, according to data compiled by Bloomberg. The yield may find support at the 100-day moving average of 0.2763 percent, the data show.

Resistance refers to an area on a chart where technical analysts anticipate orders to sell a security to be clustered and a support level is an area where they anticipate buy orders will be grouped.

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