Treasuries Rally for Second Week on Europe’s Debt Crisis, Growth
May 27, 2011, 2:42 PM EDTBy Daniel Kruger and John Detrixhe
May 27 (Bloomberg) -- Treasuries gained for a second week as the debt crisis in Europe and signs of slowing growth in the world’s largest economy increased demand for the relative safety of government debt.
U.S. 10-year notes pared earlier losses after the number of Americans signing contracts to buy previously owned homes plunged more than forecast in April, a sign the industry that triggered the recession continues to struggle. The government’s sale of seven-year notes yesterday attracted the strongest demand on record, a day after the two-year auction drew the highest investor interest in almost 17 years.
“The economy remains tepid, growth is tepid, which in the mindset of the marketplace pushes the Federal Reserve on hold probably longer,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia.
Ten-year yields rose two basis points to 3.07 percent as of 2:03 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent note due May 2021 traded at 100 14/32.
The yields, which fell eight basis points this week, dropped to 3.04 percent earlier today, the lowest since Dec. 7. The 10-year yield will advance to 3.84 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.
Early Close
Trading of Treasuries was scheduled to end at 2 p.m. in New York today and stay closed on May 30 for Memorial Day.
Treasuries have returned 1.46 percent in May, heading for the best month since August, according to Bank of America Merrill Lynch data. They rose 1.15 percent in April and have returned 2.49 percent so far this year.
“You can’t rule out a further leg down in yields, but ultimately Treasuries are coming towards the end of their recent rally,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Ltd. in Edinburgh. “The soft patch in the U.S. economy is going to be short-lived.”
The index of pending home resales declined 12 percent after a revised 3.5 percent increase the prior month, the National Association of Realtors said today in Washington. The median forecast in a Bloomberg News survey called for a 1 percent decline.
Sector Woes
“Pending homes sales is big problem,” said William Larkin, a fixed-income money manager at Salem, Massachusetts- based Cabot Money Management, which oversees $500 million. “If you look at the economy and the structural unemployment, such a large portion of it is related to housing markets.”
Consumer purchases rose 0.4 percent after a revised 0.5 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. The increase compared with the 0.5 percent median estimate of economists surveyed by Bloomberg News. Incomes climbed 0.4 percent, matching the median forecast.
The Fed’s target rate for overnight lending between banks will rise to 0.5 percent by the first quarter of 2012, according to median forecast of economists surveyed by Bloomberg News. The central bank has kept its target rate at zero to 0.25 percent since December 2008.
European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects. An index of executive and consumer sentiment in the 17-member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said today.
Greek Efforts
Greek Prime Minister George Papandreou failed to secure support from the country’s main opposition parties for new austerity measures, threatening his efforts to keep bailout funds flowing and avoid default.
Group of Eight leaders said a strengthening global economy will pave the way to cuts in the debt built up during the recession that followed the 2008 financial crisis.
Europe vowed to fight its fiscal woes with “determination,” while President Barack Obama promised a “clear and credible” U.S. deficit-reduction strategy. Japan was allowed to put off savings measures until its economy rebounds from the March earthquake and tsunami.
“The global recovery is gaining strength and is becoming more self-sustained,” according to a statement after a two-day summit in Deauville, France. Without mapping out binding targets, the leaders pledged to “remain focused on the action required to enhance the sustainability of public finances.”
At yesterday’s seven-year note auction, the securities drew a yield of 2.429 percent, compared with the average forecast of 2.448 percent in a Bloomberg News survey of nine primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 3.24, the highest level since February 2009, the beginning of records on the data for this maturity.
The government’s $35 billion auction of five-year securities May 25 drew the highest bid-to-cover ratio since 1994, while demand at the sale of the same amount of two-year debt on May 24 was the strongest since January.
--Editors: Paul Cox, Dave Liedtka
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
