Treasury Yields Fall to Records on Europe Debt Concern

Treasuries rallied, pushing five-, seven- and 10-year yields to record lows, amid concern the European debt crisis is widening and as data showed the U.S. economic expansion slowed during the first quarter.

The yield on the 10-year note pared losses as a report indicated the International Monetary Fund was discussing contingency plans for Spain’s banking crisis and a Greek poll showed support for the largest pro-bailout party. Thirty-year bond yields earlier fell to the lowest since December 2008 as U.S. weekly jobless claims exceeded forecasts, stirring speculation that tomorrow’s May employment data may trail estimates. Goldman Sachs Group Inc. cut its forecast for the 10-year note yield.

The U.S. “is perceived as a liquidity haven and a quality haven for the rest of the world,” said Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., in an interview on Bloomberg Television’s “Street Smart” with Trish Regan. Investors view U.S. government securities as “mattress money that’s safe, as opposed to a risk.”

The benchmark 10-year yield fell six basis points, or 0.06 percentage point, to 1.56 percent at 4:59 p.m. New York time. The 1.75 percent security maturing in May 2022 gained 19/32, or $5.94 per $1,000 face amount, to 101 3/4.

Record Levels

The 10-year yield today reached as low as a record 1.5309 percent. Five-year note yields dropped as low as 0.63 percent and seven-year note yields tumbled to 0.98 percent. The euro fell to an 11-year low versus the yen, while 10-year yields on German, French, Canadian and Dutch bonds declined to records lows.

“It’s hard for us to want to buy government bonds at these levels,” said Joseph Balestrino, a fixed-income strategist for Federated Investors Inc., a Pittsburgh-based money manager that oversees $369.7 billion in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker. “How low it can go is really hard to say because we’ve never been here before. What’s going on is ultimate fear again. This is not rational.”

Thirty-year bonds yields declined seven basis points to 2.64 percent. The record low was 2.509 on Dec. 18, 2008, according to Federal Reserve figures beginning in 1953.

U.S. debt has returned 1.6 percent this month, according to indexes compiled by Bank of America Merrill Lynch. The MSCI All-Country World Index of shares slid 8.7 percent in the same period. The euro has declined 6.7 percent versus the dollar this month, the most since September.

Goldman Forecast

Goldman Sachs lowered its forecast for the 10-year Treasury yield to 2 percent for the end of 2012 from its previous call of 2.5 percent, according to strategists led by Francesco Garzarelli in a research report published today. The primary dealer projected the yield will end 2013 at 2.5 percent, down from a previously estimated 3.25 percent.

“I guess we could go to 1 percent potentially,” said Mark MacQueen, partner and money manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $10 billion. “But I’m still in the camp that they’re going to muddle through and pour money into the problem over there as opposed to letting another 2008 event occur.”

U.S. 10-year yields are down from 5.3 percent in June 2007, before the financial crisis intensified, and below the average of 4.96 percent during the past 20 years. Treasuries have returned 2.6 percent since the end of March, according to Bank of America Merrill Lynch indexes, after returning 9.8 percent last year, including reinvested interest, the most since 2008.

Safe Play

“If you look at the global marketplace, we are the supermarket of safety,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “We’re talking about an elevated level of fear. This is mainly driven by growing uncertainty in Europe. People are saying ’I can buy the Treasury and I know my money will be returned to me.’”

Trading volume yesterday rose to the highest since April 10. It reached $324 billion yesterday, up from $196 billion the previous day, through ICAP Plc, the world’s largest interdealer broker. The figure is above the 2012 average of $242 billion. Volume reached $439 billion on March 14, the highest since August.

Technical Measure

U.S. debt pared a second monthly advance earlier as a technical indicator signaled their recent decline was poised to end.

The 14-day relative-strength index for 10-year Treasury yields fell to 28.5 yesterday. A reading less than 30 suggests to some traders that rates have declined too quickly and are set to change direction.

Valuation measures show Treasuries are at the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.91 percent, the most expensive level ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The U.S. economy grew more slowly in the first quarter than previously estimated, reflecting smaller gains in inventories and bigger government cutbacks.

Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.

Jobs Data

The number of Americans applying for unemployment insurance payments rose last week to a one-month high, a sign that progress in reducing joblessness may be stalling. First-time claims for jobless benefits increased by 10,000 to 383,000 in the week ended May 26 from a revised 373,000 the prior week, the Labor Department said today. The initial claims exceeded the median estimate of 370,000 in a Bloomberg News survey of economists.

“There’s a nervousness about job growth in the spring, so people are placing bets in front of Friday’s payroll number that in general it may not be good,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “If Europe continues to worsen, there’s no reason to think we can’t get to 1.5 percent.”

Economists estimate a Labor Department report tomorrow will show the U.S. added 150,000 jobs in May, up from 115,000 the previous month. The jobless rate held at 8.1 percent, a separate survey showed.

Price Levels

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.53 percent on May 25, down from a 2012 high of 2.78 percent on March 19. The rate slid nine basis points in April, the biggest monthly decline since December.

The Fed bought $1.8 billion of Treasuries due from February 2036 to August 2041 as part of the plan to replace $400 billion of shorter-term debt in its holdings with longer maturities, according to the Fed Bank of New York’s website. The Fed previously expanded its balance sheet by $2.3 trillion in two rounds of bond purchases.

The central bank also announced plans for operations during June to buy about $45 billion of longer-term debt and sell about $43 billion of shorter maturities. The final purchase is scheduled for June 29.

Fed policy makers are scheduled to meet in Washington on June 19-20 to consider what to do when the maturity-extension program expires in June.

Spain’s Debt

The Wall Street Journal reported on its website that the European department of the IMF has started discussing contingency plans for a rescue loan to Spain in the event that the country can’t find enough money to bail out the Bankia group.

The IMF is not preparing financial aid for Spain, nor has the country asked for a loan, a spokesman for the fund said.

“There’s been no request for financial assistance from Spain and the IMF is not making plans for financial assistance to Spain,” Gerry Rice, the IMF’s director of external relations, told reporters in Washington today.

A Greek opinion poll before June 17 elections showed New Democracy, the largest pro-bailout party, leading Syriza, which calls for the cancellation of the country’s bailout terms.

Italy’s prime minister and central bank chief pressed Germany to back more aggressive efforts to snuff out the escalating debt crisis, setting up a south-north showdown over how to stabilize the 17-nation euro economy.

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