Treasury yields are likely to fall to record lows if the debt crisis in Europe escalates, driving investors to the relative safety of U.S. government securities, according to JPMorgan Chase & Co.’s Terry Belton.
Treasury “10-year notes have been very highly correlated with the yield spreads of Spain, Italy and France,” Belton, the firm’s global head of fixed-income and foreign-exchange research, said in a radio interview on Bloomberg Surveillance with Tom Keene and Ken Prewitt. If those markets stay “under stress, it’s easy for 10-year notes to go as low as 1.4 percent or even 1.3 percent.”
Europe’s escalating fiscal crisis has prompted investors to flee other global investments for the safety of U.S. government bonds, pushing 10-year yields to a record low 1.4387 percent on June 1. The yield touched the highest level in a week today after China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth.
Spanish borrowing costs approached 7 percent last week, the level that prompted Greece, Ireland and Portugal to seek bailouts. Spain is struggling to avoid an international loan that would add to its debt burden and wants any aid to go directly to its financial industry. Germany, which is backed by AAA rated Finland in its stance, argues any aid must come with austerity strings attached.
Spanish government bonds advanced today after the nation exceeded its maximum target at a debt sale, easing concern about financing the region’s third-biggest budget deficit. Spain’s 10-year securities fell to 6.15 percent as investors bought 2.07 billion euros of Spanish securities, the central bank said, surpassing its maximum target of 2 billion euros.
“The barometer we are watching are yields on 10-year Spanish debt,” Belton said in the interview. “If they were to reach the 7 percent level -- get as high as 7.5 percent -- and the European Central Bank doesn’t step in, that would be a catalyst for 10-year notes to go through the 1.4 level.”
European stocks and U.S. shares extended gains as China’s move added to an Australian rate cut this week and expressions of concern from European and U.S. central bank officials that fanned expectations for more stimulus.
China’s “rate cut is a positive that should help global growth and help stabilize risky assets,” said Belton. “We, like most other participants, have been downgrading our growth on China. We are not overly pessimistic.”
JPMorgan has cut its full-year economic growth forecast for China twice in a month and now estimates an expansion of 7.7 percent, down from 9.2 percent in 2011.
China’s benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today.
China’s non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing. The purchasing managers’ index fell to 55.2 in May from 56.1 in April, the National Bureau of Statistics and China Federation of Logistics and Purchasing said on June 3 in Beijing.
Federal Reserve Chairman Ben S. Bernanke said the economy is at risk from Europe’s debt crisis and the prospect of fiscal tightening in the U.S., while refraining from discussing steps the central bank might take to protect the expansion.
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said today in testimony to the Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”