Treasuries advanced for a second day amid speculation European leaders at a two-day summit in Brussels will fail to agree on a strategy to contain the euro bloc’s debt crisis.
Benchmark 10-year notes extended a quarterly gain as U.S. data confirmed growth in the world’s largest economy slowed in the first quarter. The Treasury will sell $29 billion of seven-year debt today, the third of three note auctions this week totaling $99 billion. European Union leaders are struggling over how to safeguard governments in Spain and Italy and keep financial turmoil from spreading.
“The bar is very low, and no one expects anything to come out of the summit that will be enforceable or lasting,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There’s no silver bullet. They’re in a situation where they have no answers.”
The 10-year yield dropped four basis points, or 0.04 percentage point, to 1.57 percent at 11:46 a.m. in New York, according to Bloomberg Bond Trader prices. It was the lowest level since June 19. The 1.75 percent note due in May 2022 gained 13/32, or $4.06 per $1,000-face amount, to 101 19/32. The yield has dropped 64 basis points since the end of March.
Current five-year note yields fell three basis points to 0.68 percent.
A valuation measure showed 10-year notes trading at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.91 percent, after reaching a record negative 0.94 percent June 1 as investors sought refuge from Europe’s debt turmoil.
A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.
The seven-year Treasury notes being auctioned today yielded 1.063 percent in pre-auction trading, compared with 1.203 percent at the previous sale on May 24, which was the lowest on record. Bids are due at 1 p.m.
Investors bid for 2.8 times the amount of debt available last month, a figure called the bid-to-cover ratio, versus 2.83 times in April. The average for the past 10 auctions is 2.84. Indirect bidders, a class of investors that includes foreign central banks, bought 42.7 percent of the notes at the May sale, versus an average of 40.6 percent for the past 10 offerings.
“We should see better demand, aided by the continuation of Twist, with the Fed purchasing 32 percent in this sector,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, wrote in a note to clients. The firm is one of the central bank’s 21 primary dealers, which are obligated to participate in Treasury auctions.
The Fed’s Operation Twist program replaces short-term debt in the central bank’s holdings with longer-term Treasuries to extend the average maturity. Policy makers last week expanded it to $667 billion and extended it to year-end.
The central bank sold $8.63 billion of Treasuries today due from November 2014 to June 2015 today as part of the effort to put downward pressure on interest rates and ease conditions in financial markets.
Demand at the Treasury’s other two note sales this week was lower than average. The bid-to-cover ratio at the $35 billion sale of five-year debt yesterday was 2.61, versus an average of 2.97 at the past 10 offerings. A sale of the same amount of two-year securities on June 26 had a ratio of 3.62, versus 3.95 at the previous sale and an average 3.71 at the past 10.
The U.S. Treasury has sold $1.046 trillion in notes and bonds this year as the Obama administration finances a fourth-straight deficit exceeding $1 trillion.
U.S. government securities have returned 1.9 percent this year, compared with a 2.3 percent gain by global sovereign debt and a 4.9 percent advance by global corporate bonds, according to Bank of America Merrill Lynch indexes.
Treasuries have swung between gains and losses for a week as investors waited for the European summit.
Volatility declined for an eighth day yesterday, according to Bank of America Merrill Lynch’s MOVE index. The gauge fell to 70.2 basis points, the lowest level since May 29. The index measures price swings based on options.
Angela Merkel, Germany’s chancellor, is increasingly isolated as French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy unite to push for quicker action to ease the crisis that emerged in Greece in 2009. Merkel rejected calls to do more to cut their borrowing costs.
“It’s a different day, but the same story,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “Our domestic picture isn’t that bad, but it is being ruled by outside forces that we cannot control. With little domestic data to drive us, we are in the perfect storm for headlines to whip us around.”
U.S. government securities have returned 3.2 percent this quarter, according to Bank of America Merrill Lynch data, amid concern Europe’s crisis is worsening. That’s the most since the third quarter of last year. They returned 9.8 percent in 2011.
Treasuries remained higher today as Commerce Department data showed U.S. gross domestic product expanded at a 1.9 percent annual pace last quarter, matching the government’s previous estimate, Commerce Department data showed. Growth slowed from 3 percent in the final three months of last year.
The number of initial claims for unemployment benefits in the U.S. decreased by 6,000 to 386,000 in the week ended June 23, in line with the median forecast of economists surveyed by Bloomberg News, Labor Department data showed today. The prior week’s reading was revised up to 392,000 from 387,000, matching an April figure as the steepest of 2012.