Treasury Yields Fall to Record Low in 2nd Monthly Rally

Treasury yields touched record lows, while prices headed for a second monthly gain, as Europe’s fiscal crisis and signs of slowing economic growth fueled demand for the relative safety of U.S. debt.

Government securities returned 3.2 percent since the end of March through yesterday, Bank of America Merrill Lynch data show. The MSCI All-Country World Index of shares declined almost 10 percent. The Standard & Poor’s GSCI gauge of commodities tumbled 12 percent. Investors are willing to overlook the low yields on Treasuries in exchange for the security they offer, said George Goncalves, the head of rates research in New York at Nomura Securities International Inc.

“Yields are telling us the world is headed for a recession and the euro may break up,” said Tsutomu Komiya, who helps oversee the equivalent of $111 billion as an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan’s second-biggest brokerage. “It’s going to be a long battle to stabilize the world economy.”

U.S. 10-year yields, the benchmark for borrowing costs worldwide, were 1.62 percent as of 7:03 a.m. in London, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 changed hands at 101 5/32.

The rate was as low as 1.5933 percent earlier, the least ever. Ten-year notes yielded as little as 1.33 percentage points more than two-year securities, the narrowest spread since the end of 2008.

Ten-year rates dropped to 2.86 percent in Australia today and to 1.26 percent in Germany yesterday, both all-time lows.

Japan’s yield declined 1 1/2 basis points to 0.82 percent. It slid as far as 0.81 percent, a level not seen since 2003. A basis point is 0.01 percentage point.

Relative-Strength Index

“I need a place to put my cash,” Goncalves said yesterday on the “Surveillance Midday” Bloomberg television program with Tom Keene. “You’re not sensitive to the interest coupon that you’re going to receive.”

The rally is “probably getting close to an end,” he said. Nomura is one of the 21 primary dealers that trade directly with the Federal Reserve.

The 14-day relative-strength index for 10-year yields was 29. A reading less than 30 suggests to some traders that rates have declined too quickly and are set to change direction.

Investors scooped up Treasuries on concern Greece’s efforts to battle a recession will lead it to abandon the euro. Ten-year yields climbed to 5.93 percent in Italy and to 6.66 percent in Spain yesterday as investors questioned whether the countries will be able to pay their debts.

Jobs Growth

In the U.S., economists estimate the nation added 150,000 jobs in May, according to the median estimate in a Bloomberg News survey before the Labor Department reports the figure tomorrow. The gain was 115,000 in April.

The jobless rate probably held at 8.1 percent, a separate survey showed, staying above 8 percent since February 2009. The Commerce Department will trim its estimate of first-quarter growth to 1.9 percent from 2.2 percent today, according to another poll.

Brazil cut its benchmark interest rate to a record low of 8.5 percent as Europe’s debt crisis threatens Latin America’s biggest economy.

Fed policy makers are scheduled to meet in Washington on June 19-20 to consider what to do when their $400 billion maturity extension program, known as Operation Twist, expires in June.

The central bank plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of the plan, according to the Fed Bank of New York’s website. The Fed bank previously expanded its balance sheet by $2.3 trillion in two rounds of bond purchases.

Fed Comments

Fed Bank of Boston President Eric Rosengren yesterday called for new monetary stimulus, saying the U.S. economy is too weak to generate more jobs growth. He joins Chicago Fed President Charles Evans in calling for extra easing.

New York Fed President William C. Dudley said yesterday additional stimulus probably won’t be needed unless the economy falters. Fed Bank of Dallas President Richard Fisher said yesterday he doesn’t know what the U.S. would gain from further easing. Rosengren, Evans and Fisher don’t vote on monetary policy this year.

Rosengren said more easing is warranted by his “expectations of only modest growth, no improvement in the unemployment rate, an inflation forecast below 2 percent and significant downside risks to the forecast.”

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, narrowed 20 basis points in May to 2.06 percentage points. It was the biggest monthly decline since September.

The average over the past decade is 2.15 percentage points.