Treasury seven-year yields dropped to a record as euro-area officials argued over how to keep the 17-nation currency bloc together, boosting demand for the safety of U.S. government debt.
Ten-year yields were within four basis points of an all-time low and borrowing costs tumbled to the least ever in Germany and the U.K following yesterday’s EU summit in Brussels. A $29 billion auction of seven-year Treasuries today is poised to draw a record-low rate. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he sees deflation.
“The meeting only confirmed that there remains huge disagreement,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Disappointment with the political process and also the macro picture is generating risk aversion sentiment. Given the general market sentiment, the pressure remains downward for yields in the immediate future.”
The Treasury seven-year yield was little changed at 1.16 percent at 10:41 a.m. London time after dropping to a record 1.1301 percent, according to Bloomberg Bond Trader prices. The 1.25 percent security due April 2019 traded at 100 19/32.
The benchmark 10-year yield was at 1.74 percent. It earlier dropped to 1.71 percent, approaching the record low of 1.6714 percent set on Sept. 23.
German, U.K. Records
German 10-year yields declined as much as three basis points, or 0.03 percentage point, to 1.351 percent, while similar-maturity U.K. gilts slid to 1.738 percent.
Germany has “huge difficulties” with France’s call for joint borrowing by euro governments, Chancellor Angela Merkel told reporters in Brussels early today after six hours of talks. European leaders also called on Greece to stick with budget cuts needed to stay in the euro.
There’s “more than a whiff of deflation out there,” Gross wrote yesterday on Twitter.
Investors demand 2.52 percentage points of extra yield to buy 30-year bonds instead of two-year notes. The spread narrowed to a seven-month low of 2.48 percentage points on May 17. Thirty-year bonds are more sensitive to inflation because of their longer maturities.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.16 percentage points, down from this year’s high of 2.45 percent in March. 20. The 10-year average is 2.15 percent.
Treasuries will continue to benefit from the flight to quality, according to Robert Brown, president of the bond unit at Boston-based Fidelity Investments, which oversees $1.62 trillion. Ten-year yields may fall to 1.5 percent, he said yesterday on Bloomberg Television’s “Street Smart” with Adam Johnson and Trish Regan.
“We are looking at a period of significant volatility,” Brown said. “Our number one focus is preserving principal.”
The seven-year notes being sold today yielded 1.19 percent in pre-auction trading. The securities were sold at a record-low yield of 1.347 percent at the previous auction on April 26.
Investors bid for 2.83 times the amount offered last month, the same as the average for the past 10 auctions.
Treasuries have rallied since March on speculation Greece will abandon the euro as it combats a recession, leading other nations in the currency bloc to consider doing the same.
“Treasuries are expensive,” said Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. “Yields are at the bottom end of the range. To pierce these lows, some of the risks that we’re talking about are going to need to materialize.”
Ten-year yields will increase to 2.45 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings. Jolly predicts 2.5 percent.
The Federal Reserve 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 support the economy.
A U.S. report today will show orders for durable goods rose 0.2 percent in April, after falling a revised 3.9 percent in March, a Bloomberg News survey of economists shows. China’s manufacturing may shrink for a seventh month, a private purchasing managers’ index showed today.
Treasuries returned 1.2 percent this month as of yesterday, Bank of America Merrill Lynch indexes show, reflecting demand for the relative safety of U.S. debt. Investors tracking the MSCI All-Country World Index of stocks lost 8.3 percent over the same period, including reinvested dividends.