Treasury Bonds Hold Advance on Spanish Banks

Treasury 30-year bonds held a four-day advance as shares of Spanish banks declined, adding to concern the euro region’s crisis is infecting larger economies.

U.S. 10-year yields were little changed after reaching the least since Oct. 4 yesterday. Investors are due to bid at a sale of 10-year inflation-protected notes today and three auctions of coupon-bearing debt next week. Treasuries dropped earlier after a report showed Japan’s economy expanded faster than estimated in the first quarter.

“One would expect that the ongoing euro crisis, which certainly looks likely to intensify from here, would certainly limit the upside to any move in bond yields,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. That would “argue in favor of the path of least resistance remaining for lower yields on the back of continued safe-haven flow.”

The 30-year yield fell one basis point, or 0.01 percentage point, to 2.89 percent at 8:31 a.m. New York time, according to Bloomberg Bond Trader prices. The 3 percent bond due May 2042 rose 5/32, or $1.56 per $1,000 face amount, to 102 6/32. The 10-year rate was little changed at 1.76 percent after rising as much as three basis points to 1.79 percent.

Treasury notes erased a decline as Spanish lender Bankia SA plunged as much as 29 percent after El Mundo reported that its depositors were withdrawing their money.

Greek Concern

Greece’s inability to form a government is fueling concern the nation will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since 2010.

“Investors are flocking to safe assets,” said Bin Gao, head of interest-rate research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “If we get Greece dropping out of the euro, I see much lower yields for U.S. Treasuries.”

U.S. 10-year rates would approach 1.5 percent, he said, below the record low of 1.67 percent.

The Treasury Inflation Protected Securities being sold today yielded negative 0.387 percent, versus negative 0.089 percent for the March 22 sale, which was the lowest-ever auction rate. Yields on seven-year notes, scheduled for sale May 24, were at 1.18 percent after sliding to a record 1.1679 percent yesterday.

Inflation Protection

The TIPS auction will total $13 billion, and the government is scheduled to announce the size of next week’s sales today.

The U.S. will offer $35 billion of two-year securities on May 22, the same amount of five-year debt on the following day and $29 billion of seven-year notes on May 24, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.

U.S. inflation-protected notes pay interest on a principal amount that increases at the same rate as the Labor Department’s consumer price index.

The securities have handed investors a 13 percent gain in the past year through yesterday, versus 8.8 percent for conventional Treasuries, according to Bank of America Merrill Lynch indexes.

The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.08 percentage points. The average during the past decade is 2.15 percentage points.

Fed Purchases

The five-year, five-year forward break-even rate, a measure of inflation expectations that the Federal Reserve uses to help guide monetary policy, was 2.5 percentage points as of May 14. The figure compares with 2012’s high of 2.78 percentage points and the five-year average of 2.79 percentage points.

The Fed plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs.

The MSCI Asia Pacific Index snapped a six-day drop earlier after data showed Japan’s gross domestic product rose an annualized 4.1 percent from the final three months of 2011. That exceeded all but seven of 27 estimates in a Bloomberg News survey of economists.

More Americans than forecast filed applications for unemployment benefits last week, a sign the labor market is making little progress.

Jobless claims were unchanged at 370,000 in the week ended May 12, Labor Department figures showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg News

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