U.S. 10-Year Notes Add to Longest Gain Since ’98

Treasuries had the longest streak of weekly gains in more than 13 years after elections in France and Greece added to concern governments may struggle with deficit-cutting plans used to combat the region’s debt crisis.

Ten-year yields reached the lowest level since January as a $2 billion trading loss at JPMorgan Chase & Co. boosted demand for the safest assets. Thirty-year bonds gained for a sixth week as wholesale inflation declined last month before a report on May 15 that may show that consumer prices were unchanged.

“Problems in Europe, the U.S story is still one of low growth and the JPMorgan story all helped provide a good atmosphere for Treasuries,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. “The market doesn’t have a lot of experience in dealing with cycles that are so policy dominated, so until something clearly changes investors will stay risk-averse.”

The benchmark 10-year yield fell four basis points this week, or 0.04 percentage point, to 1.84 percent in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 traded at 99 6/32.

The 10-year yield dropped to 1.79 percent on May 9, the lowest since Jan. 31. Thirty-year bond yields declined six basis points to 3.01 percent.

Long Run

The last time 10-year notes rallied for so long was a nine-week advance that ended in October 1998, driven by demand for safety after Russia said in August of that year it would allow its currency to depreciate and delay some debt payments.

Treasuries have gained 0.7 percent during the past month, according to Bank of America Merrill Lynch indexes.

“The Treasury market is telling us that there’s a lot of uncertainty,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Most of it is centered around Europe.”

Bill Gross at Pacific Investment Management Co. and Jan Hatzius at Goldman Sachs Group Inc. said investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing economy.

A Fed decision to buy more bonds is “getting closer,” Pimco’s Gross, who runs the world’s largest mutual fund in Newport Beach, California, wrote on Twitter on May 8.

Debt Sales

The U.S. Treasury sold $72 billion in three-, 10- and 30-year debt, as demand for a refuge from Europe’s turmoil helped the U.S. sell $24 billion of 10-year notes at 1.855 percent on May 9, a record low for an auction. Ten-year yields dropped to 1.67 percent on Sept. 23, the least ever.

The government will auction $13 billion of 10-year Treasury Inflation Protected Securities on May 17.

Talks on forming a Greek government entered a fifth day, adding to speculation the nation will abandon the euro as its currency amid a worsening recession.

“The risks of contagion for other countries of the euro zone have been reduced,” German Finance Minister Wolfgang Schaeuble told the Rheinische Post newspaper in an interview published yesterday when asked whether the euro-region is prepared for a Greece exit.

France’s Francois Hollande, who will become the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for less austerity and more growth in the region. Hollande’s platform calls for policies German Chancellor Angela Merkel opposes, including increased spending and delayed deficit cuts.

European Economy

Gross domestic product in the 17-nation euro area will drop 0.3 percent this year, the European Commission said. Greece’s economy will contract 4.7 percent, the deepest slump in the region, the commission said.

JPMorgan Chief Executive Officer Jamie Dimon said May 10 the company suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.

“JPMorgan have put banks into the spotlight again and that is bad for risk sentiment and supportive for Treasuries,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich.

Treasury 10-year note yields may fall to a record low 1.5 percent as global economic-growth concern persists, according to Deutsche Bank AG’s Dominic Konstam. “The lack of impetus to growth in the U.S., as well as abroad, is fast unraveling prospects for sustainable fiscal tightening,” analysts led by Konstam wrote in a note to clients.

Futures Bets

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending May 8, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 132,728 contracts on the Chicago Board of Trade. Net-short positions fell by 12,028 contracts, or 8 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Wholesale prices in the U.S. fell in April for the first time in four months, led by a decline in fuel costs that signals inflation may cool. The 1.9 percent increase during the past 12 months was the smallest since October 2009. The producer price index dropped 0.2 percent after no change in March, Labor Department figures showed yesterday in Washington.

The CPI was unchanged last month, compared with a 0.3 percent gain in March, according to the median of a Bloomberg News survey of 65 economists before the Labor report May 15.

The difference between the yields on the 10-year note and 10-year TIPS, known as the break-even rate, dropped to as low as 2.13 percentage points, the least since Feb. 2. The rate has averaged 2.15 percentage points for the past 10 years.

The 10-year note yield will rise to 2.48 by the end of the year, according to the weighted average in a Bloomberg News survey.