Treasuries Gain as Fed Policy Meeting Begins Amid Greek Gridlock

Updated on

Treasuries gained, pushing 10-year note yields to the lowest in almost two weeks, amid an impasse between Greece and its creditors that fueled demand for safe assets as Federal Reserve policy makers began a two-day meeting.

The U.S. securities climbed with German bunds as Greece signaled it won’t make further concessions to unlock bailout funds needed to avoid default. The crisis in Europe and uneven economic data in the U.S. may complicate the Federal Open Market Committee’s drive to raise interest rates, as investors cut bets that Treasury prices would drop, according to JPMorgan Chase & Co.

“The market is waiting for tomorrow’s Fed while at the same time it’s at the mercies of the headlines from Europe,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 22 primary dealers that trade with the Fed. “The Fed is going to set the stage for the eventual move this year.”

Benchmark Treasury 10-year yields fell five basis points, or 0.05 percentage point, to 2.31 percent at 4:59 p.m. New York time, the lowest since June 4, according to Bloomberg Bond Trader data. The 2.125 percent note due May 2025 rose 13/32, or $4.06 per $1,000 face amount, to 98 12/32.

German 10-year bund yields dropped three basis points to

0.80 percent.

Policy makers in the U.S. will raise borrowing costs in about 5 1/2 months, a Morgan Stanley index shows.

Net Shorts

“Investors are a little apprehensive about Greece -- there hasn’t been any good news,” said Thomas Di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “The Fed will be as dovish as they can be given what’s going on with Greece.”

Treasuries remained higher after a report showed U.S. housing starts fell 11.1 percent in May after surging 22.1 percent in April. Separate reports on Monday showed U.S. factory production declined last month, clouding the economic picture as the Fed seeks signs that growth is robust enough to support a rise in borrowing costs.

The proportion of net shorts, or bets the price of Treasuries will decrease, slipped to 22 percentage points in the week ending Monday, compared with 30 percentage points the previous week, according to a client survey by JPMorgan. The proportion of outright shorts ebbed to 38 percent from 39 percent, while outright longs rose to 16 percent from 9 percent.

Investors cut neutral bets to 46 percent, the lowest since September, from 52 percent, the survey reported.

Foreign Accounts

U.S. policy makers face an intensifying standoff between Greece and its creditors as they determine when to raise interest rates for the first time since 2006.

“If they don’t start to intimate hiking rates, it will be difficult for them to pull it off in a year,” said Aaron Kohli, U.S. interest-rate strategist with BNP Paribas SA in New York.

Treasuries have tumbled 2.1 percent this quarter, headed for the steepest loss in two years, based on Bloomberg World Bond Indexes.

In a bond-market selloff, yields rise and become more attractive. U.S. yields are also considerably higher than those in Europe, with 10-year Treasuries at about 151 basis points higher than yields on similar-maturity German bunds.