U.S. 10-Year Yield Touches 3-Month Low on Europe Debt

Treasury 10-year note yields touched a three-month low on safe-asset demand after elections in France and Greece raised concern governments will drop deficit-cutting plans used to combat the region’s debt crisis.

U.S. debt rallied after Francois Hollande, who defeated French President Nicolas Sarkozy, pledged to push for less austerity. U.S. 10-year swap spreads widened to the most since January on demand for government debt versus higher-yielding assets. The Federal Reserve purchased $1.83 billion of Treasuries.

“The world is a dangerous place,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 firms that trade Treasuries with the Fed. “A lot of the austerity measures are turning people against incumbents. It keeps a bid in the Treasury market.”

U.S. 10-year yields fell by 1 basis point to 1.87 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due February 2022 rose 2/32 or 63 cents per $1000 face amount to 101 1/8. The yield fell as low as 1.82 percent, the least since Feb. 3.

“It’s a wait-and-see for how France and Germany work together,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York.

Record Trend

Treasury 10-year note yields may fall to a record low 1.5 percent as global economic growth concern persists, according to Dominic Konstam at Deutsche Bank AG, a primary dealer. The yield reached an all-time low of 1.67 percent on Sept. 23.

“The lack of impetus to growth in the U.S., as well as abroad, is fast unraveling prospects for sustainable fiscal tightening,” analysts led by Konstam wrote in a note to clients dated May 4. “European elections, and particularly those in France and Greece, are being construed as a plebiscite on growth versus austerity. Fiscal backsliding is likely to further crowd out lending to the private sector.”

Volatility dropped on May 4 to the lowest since June 2007. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, fell to 57.8 basis points. It reached 93.3 basis points on March 20, the highest level this year. It has averaged 112.5 basis points for the past five years.

The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt widened to as much as 14.63 basis points, the most since Jan. 18. Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

Fed Buys

The Fed purchased securities due from February 2036 to May 2041 as part of the debt-swap plan known as Operation Twist to lower borrowing costs and boost the economy, according to the Fed Bank of New York’s website.

The U.S. will auction $32 billion in three-year notes tomorrow, $24 billion in 10-year debt May 9 and $16 billion in 30-year bonds the following day, the same amounts sold in each so-called refunding month since November 2010.

Hollande, who becomes the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for more growth in the region. “Austerity is not inevitable,” he told supporters in Tulle, France, yesterday. The result of Greek elections also cast doubt on whether the government can make spending cuts needed to ensure the flow of bailout funds.

Measures aimed at stemming Europe’s debt woes have driven economies from the Netherlands to Spain back into recession, emboldening politicians campaigning for growth. Spanish and Italian bond yields surged to records last year on concern that governments in the region won’t be able to pay off their loans.

Inflation View

While yields on Treasuries due in 10 years or less are below the pace of inflation, demand for safety is being buoyed by concern about U.S. jobs growth and Europe’s debt crisis. The International Monetary Fund said the amount of global assets that investors consider “safe” will shrink by $9 trillion by 2016.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt known as the break-even rate, was 2.21 percentage points, touching the lowest since February. The average for the past decade is 2.15 percentage points.

Valuation measures show Treasuries rose to the most expensive level in three months. The term premium, a model created by economists at the Fed, touched negative 0.73 percent, the most expensive since Feb. 6. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasuries rallied on May 4 as employers in the U.S. added 115,000 jobs in April, versus 160,000 projected by a Bloomberg News survey of economists before the report.

Ten-year yields will increase to 2.52 percent by year-end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

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