Treasuries Yield Approaches Record on Debt Crisis Concern

Treasury 10-Year Yield Slides to Record as Stocks Drop With Euro
Traders work at the New York Stock Exchange in New York. Photographer: Scott Eells/Bloomberg

Treasuries rose, pushing 10-year note yields to within two basis points of the record low, as stocks slid and Europe’s worsening fiscal crisis increased demand for the relative safety of U.S. debt.

The securities headed for a second monthly gain as investors sought a haven amid signs of slowing economic growth in Europe and the U.S., and as China damped speculation it would provide large-scale stimulus to boost growth. Treasuries have returned 2.6 percent since March, Bank of America Merrill Lynch data show. Investors tracking the MSCI All-Country World Index of shares lost 8.8 percent. Yields on seven-year notes fell to an all-time low as Italian and Spanish bonds slumped.

“It’s that combination of concerns about Europe and a poor tone to so-called risk markets, primarily equities,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “That’s underpinning Treasuries at the moment. Everyone is now looking at the risk-reward skew and knowing that they can’t sell it.”

Benchmark 10-year yields fell six basis points, or 0.06 percentage point, to 1.69 percent at 7:15 a.m. New York time, according to Bloomberg Bond Trader data. They reached 1.68 percent, the lowest since Sept. 23, when the record-low 1.67 percent rate was set. The 1.75 percent security due in May 2022 advanced 17/32, or $5.31 per $1,000 face amount, to 100 18/32. Seven-year yields tumbled six basis points to 1.12 percent.

The Stoxx Europe 600 Index of shares slid 0.8 percent, reversing yesterday’s percent increase, and futures on the Standard & Poor’s 500 Index slipped 0.9 percent.

Bund Yields

German bonds are outperforming Treasuries as the debt crisis in Europe deepens, with the nation’s two-year note yields at 0.02 percent. U.S. two-year notes yield 26 basis points more than the German securities, the biggest difference since June 2010 based on closing market rates.

A report from the National Association of Realtors today will probably show pending home sales in the U.S. were unchanged in April after rising in March, a Bloomberg News survey of economists showed. The figure is a leading indicator of conditions in the real estate market because it tracks contract signings.

Confidence among American consumers fell in May to the lowest level in four months, the Conference Board said yesterday. Reports this week may show the first-quarter expansion in gross domestic product was slower than the government estimated a month ago, while jobs growth quickened, according to separate Bloomberg surveys.

Recapitalization Plan Criticized

Spain’s borrowing costs climbed as the country’s central bank chief, Miguel Angel Fernandez Ordonez, resigned a month early amid criticism over the May 9 nationalization of Bankia group. The yield on 10-year Spanish debt rose to the highest since November, approaching the 7 percent mark that preceded bailouts in Greece, Ireland and Portugal.

It is “increasingly likely” that Spain will ask for external assistance, David Mackie, chief European economist at JPMorgan Chase & Co, said in an e-mailed note to investors today.

Italian securities also dropped as borrowing costs rose at an auction and an index of economic confidence in the euro area declined more than economists forecast.

Chinese stocks fell after the state-run Xinhua News Agency said yesterday that the government won’t “roll out another massive stimulus plan to seek high economic growth,” boosting demand for the safety of U.S. debt. “Current efforts for stabilizing growth will not repeat the old way of three years ago,” Xinhua said, without attributing the information.

In 2008, policy makers unveiled a fiscal stimulus of 4 trillion yuan ($586 billion at the time).

‘Reducing Risk’

“More and more people are reducing risk,” said Kei Katayama, who invests in U.S. government debt in Tokyo at Daiwa SB Investments Ltd., which has the equivalent of $62.4 billion and is a unit of Japan’s second-largest brokerage. “There’s a forced flight to quality.”

The Federal Reserve plans to buy as much as $5.25 billion of Treasuries due from August 2020 to May 2022 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 by keeping down borrowing costs.

The Fed bought $2.3 trillion of bonds from December 2008 to June 2011. Policy makers are scheduled to hold a meeting next month.

Slowing U.S. inflation will lead the Fed to do more to spur the economy, said Ward McCarthy, the chief financial economist at Jefferies & Co.

‘Disinflationary Trend’

“We’re in a pretty significant disinflationary trend,” he said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “If you continue to see sluggish data and you continue to see disinflation,” the Fed will “have no choice but to pursue an accommodative stance,” he said. Jefferies is one of the 21 primary dealers that trade directly with the central bank.

U.S. consumer prices rose 2.3 percent in April from a year earlier, slowing from 3.9 percent in September, Labor Department figures show.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has narrowed to 2.11 percent from this year’s high of 2.45 percentage points in March. The average over the past decade is 2.15 percentage points.

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