U.S. 10-Year Yields Fall Most in 10 Weeks on Europe

Treasury 10-year note yields declined the most in 10 weeks as refuge demand re-emerged amid political turmoil adding to concern Europe’s economy may founder.

U.S. 10-year notes, which have suffered more than double the losses of the broader Treasury market this year, lured investors after yields exceeded 2 percent and reached a 10-month high. Efforts to trim the European Union budget added to concern the region’s economy will struggle to expand and German exports grew less than forecast in December. The Treasury will sell $72 billion in coupon securities next week.

“We’ve seen some rotation back into Treasuries as the risk-on rally has relaxed some and risk-off has come back in vogue,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We’ve found somewhat of an equilibrium in the market. We may not see a huge rally, but the momentum is positive for Treasuries.”

Benchmark 10-year yields fell seven basis points this week, or 0.07 percentage point, to 1.95 percent in New York, according to Bloomberg Bond Trader prices. The yield drop was the most since the five days ended Nov. 30.The 1.625 percent note due in November 2022 added 19/32, or $5.94per $1,000 face amount, to 97 1/8.

The yield last touched 2 percent on Feb. 6 and reached 1.92 percent on Feb. 1, the least since Jan. 25.

Central Level

“The market is centered around the 2 percent level,” Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We’re towards the low side of that pivot point.”

Ten-year notes have lost 1.7 percent this year, more than twice the 0.8 percent loss in the broader Treasury market, according to Bank of America Merrill Lynch Indexes. The last time the security started the year with larger declines was 2011, when it lost 2.48 percent.

Hedge-fund managers and other large speculators increased their net-long position in 10-year note futures in the week ending Feb. 5, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, gained 10 percent to 46,906 contracts on the Chicago Board of Trade.

Traders increased bets on declines in 30-year bond futures by 37 percent to the most since March, while trimming net long positions 24 percent on five-year note futures, the data show.

Price Swings

Volatility in Treasuries dropped to the lowest since Jan. 24. Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, was 59.9 basis points yesterday after rising to 66.4 basis points on Jan. 30, the most since Nov. 6.

“We’re in this continuing range, given the economic and political uncertainty,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “We have the economic expansion that’s been muted. There’s a wall of investor interest at 2 percent or slightly above.”

The Treasury kept next week’s so-called quarterly refunding auctions at $72 billion, the amount sold since November 2010. Given the government’s financing needs, it sells three-, 10- and 30-year securities each month in addition to its historical quarterly offerings.

The U.S. will sell $32 billion in three-year notes on Feb. 12, $24 billion in 10-year notes on Feb. 13, and $16 billion in 30-year bonds on Feb. 14.

Europe’s Budget

European Union leaders agreed to a seven-year budget that cuts spending for the first time, bowing to U.K. Prime Minister David Cameron’s insistence on thrift. The deal, struck after 25 1/2 hours of talks in Brussels, set the budget for 2014-2020 at 960 billion euros ($1.3 trillion), down from an original proposal of 1.047 trillion euros and less than the 994 billion euros spent in the current budget cycle.

Germany’s exports gained 0.3 percent from November, when they fell 2.2 percent, the Federal Statistics Office in Wiesbaden said yesterday. Economists forecast a 1.4 percent increase, according to the median of 15 estimates in a Bloomberg News survey.

The U.S. trade gap shrank 20.7 percent to $38.5 billion, lower than any estimate in a Bloomberg survey of 73 economists and the least since January 2010, Commerce Department figures showed yesterday in Washington.

A Commerce Department report on Jan. 30 showed the economy contracted at a 0.1 percent annual rate in the final three months of the year. The trade figures probably mean the economy managed to eke out a gain when revised data are released on Feb 28.

“The trade number was not favorable to Treasuries because it will add to gross domestic product,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

The 10-year note will yield 1.95 percent at the end of June and 2.23 percent by Dec. 31, according to the weighted average forecast of economists in a Bloomberg survey.

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