Treasuries Rise 8th Day, Longest Since 2008 on Safety Bid

Treasury 10-year notes rose for an eighth day, the longest run of gains since December 2008, as investors sought safety with Spanish debt yields climbing toward levels that prompted other European nations to seek bailouts.

Yields on the benchmark U.S. securities dropped to a two-week low as gauges of inflation expectations receded from the highs reached after the Federal Reserve announced a third round of debt purchases, or quantitative easing. Investor demand for a haven pushed the yields on the $35 billion in U.S. five-year notes slated to be sold today close to record auction lows.

“It’s the chaos in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s still concern about the global economy. Those things together may have helped to bid Treasuries up. It’s the crisis that won’t go away.”

The 10-year yield dropped three basis points, or 0.03 percentage point, to 1.64 percent at 12:35 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 rose 1/4, or $2.50 per $1,000 face amount, to 99 7/8. The yield reached below its 100- and 50-day moving averages of 1.64 percent and touched 1.62 percent, the lowest level since Sept. 7. It rose to 1.89 percent on Sept. 14, the highest since May.

The eight-day advance in prices is the longest since the period ended Dec. 4, 2008, when the economy was deteriorating as the financial crisis worsened. The gains since last week pared the benchmark note’s loss for September to 0.6 percent.

Spain, Italy

Spanish 10-year bonds slumped, with yields rising the most this month, after Catalan President Artur Mas called early elections yesterday. His bid for greater autonomy came a week after President Mariano Rajoy rejected his demand for increased control of the region’s revenue.

The drop in Spain’s 10-year bond sent the yield up as much as 30 basis points to 6.04 percent. It reached a five-month low of 5.6 percent on Sept. 10. Italy’s 10-year yield rose 10 basis points to 5.2 percent, moving higher for the fifth straight day. The yield on Portugal’s 10-year debt climbed 14 basis points to 8.88 percent, the highest since it closed on Sept. 5 at 9.1 percent.

German and British government securities rose as investors sought safety, sending yields lower. The yield on 10-year German bunds dropped 13 basis points to 1.46 percent, and 10-year U.K. gilt yields decreased 13 basis points to 1.69 percent.

More Expensive

U.S. government securities were the most expensive in three weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.94 percent, the most costly since Sept. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.74 percent.

Gauges of inflation expectations are subsiding following an initial surge triggered by the Fed announcement of more debt purchases on Sept. 13.

The five-year, five-year forward break-even rate, a measure of inflation expectations the Fed uses to help guide monetary policy, was 2.74. It has fallen from 2.88 on Sept. 14, which was the most in 13 months.

“The sell-off in mid-September was an overreaction to QE3,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “This is an overreaction to the overreaction.”

Treasury Auction

The five-year notes being sold at 1 p.m. New York time today yielded 0.66 percent in pre-auction trading, versus 0.708 percent at the previous sale of the securities on Aug. 29. The record low auction bid was 0.584 percent on July 27.

Investors bid for 2.92 times the amount offered last month, up from 2.71 times on July 25. The Treasury sold $35 billion of two-year notes yesterday and plans to auction $29 billion of seven-year securities tomorrow. The U.S. is selling $99 billion in notes this week.

“All the uncertainty we’re facing means we’re not likely to be too vulnerable here,” Coard of Williams Capital said. “It will be an OK auction.”

Treasuries returned 0.4 percent since the end of June, according to Bank of America Merrill Lynch indexes. German debt gained 0.5 percent, and Japanese government bonds rose 0.4 percent, the data show.

The Federal Open Market Committee said after its September meeting the central bank will buy mortgage-backed securities at a pace of $40 billion per month, its third round of quantitative easing, until the labor market improves. Policy makers have turned to unconventional tools to tackle unemployment that has held above 8 percent since February 2009.

Mortgage Securities

A measure of relative yields on mortgage securities that guide U.S. home-loan rates fell to a record amid speculation the Fed will find a shortage of the bonds as it expands purchases. A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell one basis point today to 55 basis points higher than an average of five- and 10-year Treasury rates.

“To get yields, investors are forced to take on credit risk,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The unlimited QE has caused yields to fall and mortgages to outperform. Investors are just desperate for yields.”

The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on borrowing costs. The central bank bought $4.7 billion of debt today maturing from September 2018 to May 2020 as part of the program, according to the Fed Bank of New York’s website.

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