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Treasuries Drop Amid Bets on Response to Europe Crisis, Slowing

U.S. 30-year bond yields climbed the most in two months after European Central Bank President Mario Draghi said his policy makers are “ready to act,” adding to bets the world’s leading economies may collaborate on a response to Europe’s crisis and signs of slower economic growth.

Treasuries dropped for a third day even after the ECB kept interest rates unchanged and a report showed U.S. productivity slowed more than first estimated. Federal Reserve Bank of Atlanta President Dennis Lockhart said extending Operation Twist, the program to lengthen maturities of debt on the central bank’s balance sheet, remains an option.

“It’s a pretty good risk-on day,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of the 21 primary dealers that trade with the Fed. “There is optimism that there may be some announcement this weekend out of Europe. That’s driving some of the risk-on moves.”

Yields on 30-year bonds increased 10 basis points, or 0.10 percentage point, to 2.74 percent at 5:01 p.m. New York time, according to Bloomberg Bond Trader prices. They rose as much as 11 basis points, the most since April 3. The price of the 3 percent security due in May 2042 slid 2 1/32, or $20.31 per $1,000 face amount, to 105 10/32. The benchmark 10-year note yield added nine basis points to 1.66 percent and touched 1.67 percent, the highest level in a week.

Volume Climbs

Trading volume climbed 41 percent. About $340 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, compared with $242 billion yesterday. The average volume over the past year was $257 billion.

Stocks and commodities rallied as investor risk appetite swelled. The Standard & Poor’s 500 Index surged 2.3 percent, and the S&P GSCI Index of raw materials gained 1.3 percent.

Treasuries had their best performance last month since August amid Europe’s debt crisis and concern U.S. economic growth was slowing. They returned 1.8 percent, according to indexes compiled by Bank of America Merrill Lynch.

Ten- and 30-year yields reached record lows of 1.4387 percent and 2.5089 percent on June 1 after the Labor Department reported the economy added 69,000 jobs in May, less than half the number projected by a Bloomberg News survey of economists. The yields reached their 2012 highs in March, 3.49 percent for long bonds and 2.40 percent for 10-years.

Less Expensive

Valuation measures showed Treasuries were the cheapest today in more than a week. The term premium, a model created by economists at the Fed, was negative 0.80 percent, the least expensive since May 29. A negative reading shows investors are willing to accept yields below what’s considered fair value. The gauge closed June 1 at negative 0.94 percent, the most expensive on record. The one-year average is negative 0.44 percent.

The yield difference between 10- and 30-year Treasuries securities widened to 108 basis points today, after touching 103 basis points yesterday, the narrowest since Jan. 12. The average over the past year was 115 basis points.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or break-even rate, a gauge of trader expectations for consumer prices over the life of the debt, increased to as much as 2.19 percentage points, the widest on an intraday basis since May 23. It touched 2.01 percentage points on May 30, the least since January, after rising to 2.45 on March 20.

With European governments struggling to fix a debt crisis that’s engulfing Spain and may prompt Greece to exit the euro, pressure has mounted on the ECB to introduce more liquidity support for banks. The bank held its benchmark interest rate steady today at 1 percent. Policy makers will “monitor all developments closely, and we stand ready to act,” Draghi said in Frankfurt after the rate meeting.

‘Collective Probability’

“Sometimes markets gather steam and express a collective probability of an outcome and, by the time the outcome is explicitly communicated, the market is already at that level,” said Russ Certo, managing director of rates trading at Gleacher & Co. in New York. “It’s kind of like buy the rumor, sell the fact.”

Lockhart of the Atlanta Fed said the central bank “has the capacity to do more” with Operation Twist, which is set to expire at the end of this month. He spoke in response to audience questions at an event in Fort Lauderdale, Florida.

In the program, the Fed is replacing $400 billion of shorter-term Treasuries in its holdings with longer maturities by the end of this month to keeping borrowing costs down. The central bank bought $1.7 billion today of Treasuries due from February 2036 to August 2041 as part of the effort.

‘Optimism, Hope’

“We’re seeing a global slowdown and there’s optimism, hope that central banks are going to act in a concerted way to address this,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

Fed Chairman Ben S. Bernanke will testify tomorrow to the Joint Economic Committee on the U.S. economic outlook as policy makers prepare to open a two-day meeting on June 19. The central bank has kept its benchmark interest rate at zero to 0.25 percent since December 2008 and bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 to June 2011 to spur economic growth.

Yields on 10-year notes climbed earlier after Fed regional bank presidents voiced opposing views yesterday over whether the central bank should step up record accommodation following the lowest monthly increase in U.S. payrolls in a year.

Chicago Fed President Charles Evans said in a speech in New York that “soft” U.S. economic data call for “extremely strong accommodation,” while Richard Fisher of Dallas said more bond purchases to spur growth would be “pushing on a string.”

‘Sufficient Progress’

After policy makers met in April, Bernanke said the Fed may ease further should unemployment fail to make “sufficient progress towards its longer-run normal level.”

Unemployment in May rose to 8.2 percent from 8.1 percent the prior month, and the addition of 69,000 jobs compared with 275,000 in January.

The Labor Department’s measure of employee output per hour decreased at a 0.9 percent annual rate in the first quarter, after a 1.2 percent gain in the prior three months, revised figures showed today in Washington. Expenses per worker rose at a 1.3 percent rate and output grew 2.4 percent, less than previously estimated.

Treasuries remained lower after the Fed said in its Beige Book business survey the U.S. economy maintained a moderate pace of growth from early April to late May as factory output increased and the real-estate market improved.

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