Treasuries Rally on Greek Concern, 7-Year Yield Falls

Treasuries rose, driving the 10-year yield to a seven-month low, as Greece’s leaders prepared for more talks on forming a government amid concern failure will force the nation from the euro area.

U.S. debt advanced for a second day, with seven-year note yields falling to a record low 1.1679 percent, after the party of German Chancellor Angela Merkel was defeated in an election in the nation’s most-populous state. The difference between the two-year swap rate and the yield on similar-maturity U.S. debt widened to the most since January.

“The fear out of Europe continues as the rhetoric about the possibility of Greece leaving the euro zone gets stronger,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The global growth concerns haven’t left flight, and as such, Treasuries continue to benefit, with investors buying any dip in prices on the march to lower yields.”

The benchmark 10-year yield slid seven basis points, or 0.07 percentage point, to 1.76 percent at 5 p.m. New York time, after touching the least since Oct. 4. The 1.75 percent note due May 2022 added 21/32, or $6.56 per $1,000 face amount, to 99 28/32, according to Bloomberg Bond Trader prices.

Ten-year yields reached a record low 1.67 percent on Sept. 23 after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.

Eight-Week Advance

Ten-year notes completed an eighth weekly advance on May 11, the longest stretch since the nine weeks ended in October 1998. That series of gains had been driven by demand for safety after Russia said in August of 1998 it would allow its currency to depreciate and delay some debt payments.

“It’s all about Europe and there is a lot of chatter about the possibility of Greece exiting the euro zone and what the fallout could be,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The flight-to-quality move is in place, and as such there is demand for Treasuries as investors are looking for a safe place.”

Treasury 10-year notes will fall to 1.5 percent as the flight-to-quality trade will “accelerate.” Terry Belton, the global head of fixed-income strategy for JPMorgan Chase & Co. in New York, wrote in a note to clients.

“Political developments in Europe took a clear turn for the worse,” Belton wrote.

Swap Spreads

Royal Bank of Scotland Group Plc recommended betting on a gain in two-year U.S. swap rates as the intensifying debt crisis in Europe raises concern that banks will incur losses on their bond holdings, according to Yoshinori Shigemi, a strategist for non-yen debt at RBS Securities Japan Ltd. in Tokyo.

The gap between the two-year swap rate and the yield on similar-maturity U.S. debt may widen to 50 basis points, he said, from 39 basis points today. The spread’s previous high was 37.25 basis points on Jan. 19, according to Bloomberg data.

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.

A gauge of trader expectations for inflation slid before a Labor Department report tomorrow that economists estimate will show the U.S. consumer-price index rose 2.3 percent last month from a year earlier, down from 2.7 percent in March.

TIPS Yields

The yield gap between 10-year notes and Treasury Inflation Protected Securities, fell to as low as 2.09 percentage points today, the least since Feb. 1.

“Recent trends in inflation are showing we may be heading toward another downswing in inflation,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trades with the Federal Reserve. “With inflation low at the moment, it makes you less nervous about being in the nominal market. It takes away a little bit of demand from the TIPS market.”

The U.S. government will sell $13 billion of 10-year inflation-indexed bonds on May 17.

U.S. TIPS returned 3.1 percent this year as of May 11, compared with a 0.7 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index of U.S. shares has handed investors an 8.4 percent gain, including reinvested dividends, during the period.

Inflation Measure

The five-year, five-year forward break-even rate, a measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.6 percent as of May 9. The figure compares with a 2012 high of 2.78 percent and its five-year average of 2.79 percent.

The Fed bought $4.7 billion of U.S. bonds maturing in May 2018 to April 2019 today as part of its program to replace shorter-term notes with longer-dated debt.

Greek President Karolos Papoulias will meet party leaders today, state-run NET TV said, without citing anyone. Alexis Tsipras, who heads the largest anti-bailout party, Syriza, and rejected a unity government, won’t attend the meeting. Greece may face new national elections unless a government is formed following the inconclusive voting on May 6.

The outcome of the Greek election “has increased the likelihood of a further, disorderly Greek default and ultimately of Greece’s departure from the euro area,” Nondas Nicolaides, a senior analyst at Moody’s Investors Service, wrote in a Weekly Credit Outlook report today. “A Greek exit from the euro would be a severe credit negative for Greek banks.”

Merkel’s Christian Democratic Union got the smallest vote share since World War II in the North Rhine-Westphalia ballot yesterday.

The difference between two- and 30-year yields narrowed to 266 basis points, the least since January.

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