Treasury Yield Close to Record Low on Europe Debt Crisis

Treasury 10-year yields, the benchmark for everything from corporate bonds to mortgages, were four basis points from their record low as Europe’s fiscal crisis drove up demand for the relative safety of U.S. debt.

“The U.S. is the favorite safe haven,” said Hiromasa Nakamura, who helps oversee the equivalent of $41.4 billion in Tokyo as an investor for Mizuho Asset Management Co., a unit of Japan’s largest publicly traded bank. “There’s a flight to quality. The world economy is declining. Recently the rally has gained strength.”

Ten-year yields were little changed from yesterday at 1.71 percent as of 6:42 a.m. in London, Bloomberg Bond Trader data show. The record low was 1.6714 percent set Sept. 23. The price of the 1.75 percent security due in May 2022 was 100 13/32.

Market participants are cutting their yield forecasts. The 10-year rate will be 2.48 percent by year-end, a Bloomberg survey of banks and securities companies shows, with the most recent projections given the heaviest weightings. The projection declined from last month’s high of 2.58 percent. Nakamura, who bet on Treasuries as they rallied over the past 12 months, predicts the rate will fall to 1 percent this year or next. He dropped his prior forecast for 1.5 percent.

The MSCI Asia Pacific Index of stocks declined 3.1 percent to the lowest level in 2012, helping increase demand for debt.

Yields are tumbling in the highest-rated debt markets around the world.

Flight to Bonds

Japan’s 10-year rate slid as low as 0.815 percent, a level not seen since 2003. The rate on the same-maturity note in Australia tumbled to 3.06 percent, the least ever.

Germany’s 10-year yield dropped to a record 1.41 percent yesterday as investors question the nation’s willingness to prop up the euro’s most indebted members.

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest lenders, were cut three levels yesterday by Moody’s Investors Service, which cited a recession and mounting loan losses as it downgraded 16 of the nation’s banks. Greece’s struggle to combat a recession is raising concern it will leave the euro bloc.

The decline in yields may be curbed demand when the U.S. sells $99 billion of coupon-bearing debt next week, said Kevin Yang, who is in charge of bond investment at Hontai Life Insurance Co., which has $6 billion in assets and is in Taipei.

Auctions Loom

The auctions will consist of $35 billion of two-year and five-year securities and $29 billion of seven-year notes over three days starting May 22.

“Demand may be lower,” Yang said. “They’re expensive. The economy in the U.S. is not so weak. It’s stable.” He trimmed his Treasury holdings yesterday, he said.

U.S. gross domestic product will grow 2.3 percent in 2012, versus 1.7 percent in 2011, a Bloomberg News survey of banks and securities companies shows. The euro-area economy will shrink 0.3 percent, versus last year’s 1.5 percent growth rate, according to the estimates.

Federal Reserve Bank of St. Louis President James Bullard said yesterday economic reports this year have been stronger than forecast and he expects the central bank to raise its target interest rate by 2013. Bullard doesn’t vote on monetary policy this year.

Fed Action

Several Fed policy makers said slowing growth or higher risks to their economic outlook may warrant additional action to sustain the recovery, according to minutes of their April meeting released May 16.

The Federal Open Market Committee on April 25 reiterated its expectation that subdued inflation and economic slack will be grounds for keeping its target at almost zero at least through late 2014.

The Fed plans to buy as much as $5.25 billion of Treasuries due from August 2020 to May 2022 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs.

Treasuries rose yesterday as reports showed an index of leading economic indicators fell and manufacturing in the Philadelphia area shrank.

Yields indicate investors are cutting bets on U.S. inflation. The difference between two- and 10-year rates narrowed to 1.39 percentage points yesterday, the least since the end of 2008.

The spread between rates on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 2.04 percentage points yesterday from this year’s high of 2.45 percentage points in March.

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