U.S. Two-Year Notes Post Weekly Drop as Greece Crisis Eases
March 12, 2010, 4:15 PM ESTBy Cordell Eddings and Susanne Walker
March 12 (Bloomberg) -- Treasury two-year notes recorded a second consecutive weekly drop after Greece’s deficit crisis eased as European nations considered creating a monetary fund to support debt-strapped nations.
The yield advantage of 30-year bonds over 2-year notes fell from almost a record on reduced demand for the safety of shorter-term government debt. The two-year note’s yield touched the highest level since January as a report today showed an unexpected increase in retail sales.
“There has been a flattening in the curve with the front end selling off,” said Kevin Flanagan, a Purchase, New York- based chief fixed-income strategist at Morgan Stanley Smith Barney. “Relative stability from across the Atlantic and better economic data have led to a removal of some of the flight-to- quality trade.”
The yield on the two-year note rose less than 1 basis point, or 0.01 percentage point, to 0.96 percent at 4:10 p.m. in New York, according to BGCantor Market Data. The price of the 0.875 percent security due in February 2012 dropped less than 1/32, or 31 cents per $1,000 face amount, to 99 27/32.
The 30-year bond’s yield advantage over the two-year note fell today to 3.66 percentage points, the narrowest level since January. It reached 3.80 percentage points earlier this week and 3.85 percentage points on Feb. 17, the widest since at least 1980, according to data compiled by Bloomberg.
Two-Year Yield
The two-year note’s yield earlier reached 0.9961 percent, the highest level since Jan. 8, and posted a gain of 7 basis points this week. The 10-year note’s yield increased 2 basis points to 3.70 percent, while the 30-year bond yield slid 2 basis points to 4.63 percent.
Leaders in Europe are considering the creation of a European Monetary Fund to help nations such as Greece, whose budget deficit is more than four times the European Union’s 3 percent limit.
European Central Bank President Jean-Claude Trichet said this week the bank doesn’t reject the proposal of a fund, though it has not seen any details.
Treasury two-year notes fell last week after the Labor Department reported on March 5 that the unemployment rate held at 9.7 percent in February and payrolls fell less than economists had forecast.
Outlook for Rates
“There has been somewhat of a leakage to the flight-to- quality trade this week,” said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of 18 primary dealers that trade with the Federal Reserve. “Investors are reaching out the curve searching for yield.”
Interest-rate futures on the CME Group Inc. exchange show a 49 percent chance U.S. policy makers will raise the benchmark target rate for overnight loans by at least a quarter-percentage point by September, compared with 43 percent odds a week ago. The Fed is due to deliver a statement on March 16.
Traders added to bets that inflation will accelerate as economic growth picks up, the so-called breakeven rate indicates. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer-price gains, widened to 2.30 percentage points today, the highest level since Feb. 19. It was 2.16 percentage points two weeks ago.
U.S. Sentiment
Thirty-year bonds gained yesterday as one of the biggest yield premiums over two-year notes bolstered demand at a $13 billion auction of the 2040 securities. Bids outnumbered the amount on offer by 2.89 times, the most since September.
President Barack Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.
A failure by the U.S. to reduce its deficit may undermine investor confidence, New York Fed President William Dudley said in London yesterday.
--With assistance from Lukanyo Mnyanda in London. Editors: Dennis Fitzgerald, Greg Storey
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
