Treasury Yields Tumble to Records as Europe Fuels Bids
Treasury 10-year note yields fell to a record low as investors sought refuge from the deteriorating credit conditions of European sovereign borrowers.
The benchmark yield reached 1.6085 percent, less than its previous all-time low of 1.6714 percent on Sept. 23, as Spain struggled to recapitalize its banks and Italian bonds fell as the country sold less than its target at a debt auction. The Federal Reserve announced Sept. 21 that it would buy $400 billion of longer-term Treasuries, funding the purchases with sales of shorter-term notes, in an effort to bolster the U.S. economy and spur jobs growth.
“The continued rally is evidence by flight to quality that is being exacerbated by the lack of other safe assets,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Fed. “The lack of progress in Europe is causing increased angst in the Treasury market.
Benchmark 10-year note yields fell 12 basis points to 1.62 percent at 5:02 p.m. New York time after touching the lowest in Fed figures beginning in 1953. The 1.75 percent note due May 2022 added 1 1/8, or $11.25 per $1,000 face amount, to 101 5/32, according to Bloomberg Bond Trader prices. The yield drop was the biggest for the benchmark note since April.
Thirty-year bond yields declined 13 basis points, the most since November, to 2.71 percent, the least since October. Five-and seven-year note yields reached set all-time lows.
Benchmark government bond markets around the world are setting records on haven demand while yielding less than Treasuries, boosting the appeal of the U.S. securities.
Yields on the 10-year note are 21 basis points higher than the average for top-rate sovereign debt of nations from Germany to Australia, above the average of 12 basis points in the past year, data compiled by Bloomberg show. German two-year debt yields fell as low zero today, compared with 0.27 for U.S. two-year notes.
‘‘People want to invest in the safe haven assets,’’ said Peter Fisher, head of fixed income at BlackRock Inc. (BLK), on Bloomberg Television’s ‘‘InsideTrack’’ with Erik Schatzker, Sara Eisen, Stephanie Ruhle and Scarlet Fu. ‘‘You don’t buy Treasuries or bunds, either one, as a return play.’’
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.
The 10-year yield may decline to 1.5 percent, said FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields in 2011. Low was the only one among 70 analysts in a Bloomberg News survey who predicted the yield would fall to 2 percent by the end of last year.
‘‘Today’s move is huge and it’s driven almost entirely by fear,” Low said. “The pace of events in Europe has accelerated and it’s accelerating at the same time European leaders seem to be reaching an impasse on solutions.”
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, or TIPS, which represents traders’ expectations for the rate of inflation over the life of the bonds, fell to 2.01 percentage points, the lowest since Jan. 17. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20.
“I don’t think there’s any inflation in the cards, not with the slack in the labor markets and the headwinds being presented by the European crisis,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.
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 difference between yields on Treasuries maturing in two and 30 years, known as the yield curve, narrowed to 2.45 percentage points, the lowest since January 2009.
“Investors are creeping out the curve looking for yield,” Barclays’ Pond said. “If it were a normal flight to quality, investors would just flock into the short end.”
Yields on U.S. 10-year notes, which are benchmarks for everything from mortgages to corporate bonds, fell in each of the nine weeks through May 18, the longest stretch since 1998. Treasuries gained for nine weeks through the period ended Oct. 2, 1998, when investors sought safety amid declines in Asian currencies, a default by Russia on its sovereign debt and the collapse of hedge fund Long-Term Capital Management LP.
While the amount of Treasuries outstanding has more than doubled to $10.4 trillion since 2007, a decline in securities globally deemed safe enough to meet tougher bank regulations has made the debt seem scarce. Citigroup Inc. says the pool of “high-quality” debt from the U.S., U.K., Germany and nine other European countries is 72 percent of what it was in 2007.
“There is no interest-rate bogey man lurking ahead,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “I can’t make the argument for rates to move up visibly higher from here because you still have all of these forces weighing on the whole U.S. rate structure.”
Banks have increased Treasury holdings 5.2 percent since December to $475.8 billion while boosting their stake in mortgage debt sold by government sponsored enterprises Fannie Mae and Freddie Mac 7.4 percent to $1.3 trillion, Fed data show. The combined amount is up from $1.25 trillion in 2008.
Primary dealer holdings of U.S. government debt rose to $108 billion, the highest ever, as of May 16, from a net bet against the securities of $11.9 billion in September, according to the Fed. Banks have added Treasuries to meet revised reserve rules from the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland.
Central banks, led by the Fed, have also taken Treasuries out of the market. The Fed has increased its position in U.S. government debt to $1.67 trillion from $475 billion in March 2009 as it undertook two rounds of asset purchases to bolster the economy. Foreign central banks hold $2.78 trillion of U.S. government debt in custody at the Fed, a $90.6 billion or 3.4 percent increase from the end of 2011, central bank data shows.
The Fed bought $4.74 billion of Treasuries maturing from August 2020 to February 2022 today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries.
Even at historically low yields, investors are showing a greater reluctance to sell the debt. Average weekly trading volume in April among the 21 primary dealers was $495.7 billion, or 4.8 percent of the amount outstanding. That’s down from $649 billion in June 2007, or 15 percent of the $4.3 trillion outstanding. Back then, the 10-year note yield reached 5.32 percent.
Valuation measures show Treasuries are near the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.86 percent, the most expensive level ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Investors have bid $3.19 for each of the $903 billion of notes and bonds sold by the U.S. so far this year, a faster pace than the record $3.04 bid for each of the $2.1 trillion auctioned by the Treasury in 2011.
Top-rated assets are in short supply worldwide. The U.S., Germany, Switzerland, Sweden and the U.K. are the only Group-of-10 nations with credit-default swaps trading at less than 100 basis points, the cheapest to insure against default, down from eight a year ago, according to data compiled by Bloomberg.
Bank of America Merrill Lynch’s AAA Rated Global Fixed Income Index contained 3,597 securities with the highest ratings as of April 30, down from a high of 5,331 in December 2007 and the fewest since November 2005. AAA debt assets have returned about 2.18 percent, including reinvested interest, according to the index. Ten-year Treasuries have gained 2.53 percent.
The average rate on a typical 30-year fixed-rate mortgage reached a record-low 3.78 percent on May 24, down from 4.08 percent on March 22, according to Freddie Mac surveys.
Company bond offerings worldwide have fallen behind the pace set in 2011 after a record first quarter fizzled out amid Europe’s escalating debt crisis and a U.S. slowdown. Sales of $1.63 trillion this year compare with the $1.73 trillion for the same period of 2011. As recently as the end of April, offerings were ahead of last year.
The 10-year Treasury yield has plunged since reaching 2.40 percent on March 20, the highest since October, on speculation that the pace of gains in the U.S. labor market was increasing and as investors in Greece’s sovereign debt agreed to restructure the loans at a discount to their original face value.
The economic outlook is for faster growth in the U.S. than in Europe. America’s gross domestic product will expand 2.3 percent this year, according to the median forecast of 74 economists, while Europe’s economic output shrinks 0.35 percent, the median estimate of 32 economists in separate Bloomberg surveys show.
The European Commission called for direct euro-area aid for troubled banks, and touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis threatening to overwhelm Spain.
Italy sold 5.73 billion euros of five- and 10-year debt, falling short of the maximum target of 6.25 billion euros ($7.1 billion). The average yield on the five-year security was 5.66 percent, up from 4.86 percent at an auction of similar-maturity debt on April 27. The 10-year yield was 6.03 percent, from 5.84 percent in April.
“Bunds and Treasuries will remain fairly well bid until we have a political solution,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “At the present time, a solution seems well off. We don’t see any catalysts to reverse the progression to lower yields.”