Bloomberg News

Treasuries Gain on Concern U.S. Economy Weakening; Stocks Drop

June 10, 2011

June 10 (Bloomberg) -- Treasuries rose, with two-year notes gaining for a ninth weekly in their longest winning streak since February 2008, as stocks fell on a weakening economy.

The Federal Reserve released its final schedule of operations under its $600 billion of debt buying, saying it will purchase $50 billion of securities through the end of June. In July, the central bank will continue to reinvest into Treasuries proceeds from agency and mortgage-backed holdings.

“People are nervous about economic growth going forward,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York. “As a result, the Fed will be on hold for a very long time, so the best place to be now is in U.S. Treasuries.”

Yields on 10-year notes dropped three basis points, or 0.03 percentage point, to 2.97 percent at 5:05 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security maturing in May 2021 rose 7/32, or $2.19 per $1,000 face amount, to 101 10/32.

The 10-year note yields fell yesterday to 2.92 percent, the lowest level since Dec. 3. Yields on two-year notes slid two basis points to 0.40 percent after dropping on June 8 to 0.37 percent, the lowest level since Nov. 8. The yields slid four basis points this week.

‘Outright Slowdown’

“The back end is benefiting from the outright slowdown,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Stocks are getting pummeled as people are taking chips off the table.”

The Standard & Poor’s 500 Index dropped 1.4 percent, extending its sixth weekly decrease. Crude oil for July delivery fell 3 percent to $98.91 a barrel.

While New York Fed President William C. Dudley said today he expects “a moderate economic recovery to be sustained,” he also said “the recent disappointing data suggest that downside risks to the outlook” have increased.

The economy will probably recover from recent weakness in part because a surge in commodity prices, the March earthquake in Japan and “severe weather” in the U.S. are transitory, Dudley said in Brooklyn, New York. He expects “disappointing” economic growth to improve, even as “downside risks” such as higher commodity prices have increased.

Record monetary accommodation is still needed to boost a “frustratingly slow” U.S. economic recovery, Fed Chairman Ben S. Bernanke said in Atlanta on June 7. Policy makers are due to meet in Washington on June 21-22.

Fed Rate View

Futures contracts showed the likelihood of an increase in the fed funds target by the March 2012 meeting fell to 19 percent, from 24 percent a week ago. The Fed’s target rate for overnight lending between banks has stayed at zero to 0.25 percent since December 2008.

Retail sales in the U.S. dropped 0.4 percent in May after a 0.5 percent increase in the previous month, according to the median forecast in a Bloomberg News survey before a report next week. The consumer-price index advanced 0.1 percent last month after a 0.4 percent gain in April, according to a separate Bloomberg News survey.

“There’s a lot of bad news being priced into the market,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, one of 20 primary dealers that trade with the central bank. “We’re setting the bar low for an upward surprise in the data.”

Treasuries have returned 3.1 percent this quarter, the most since the second quarter of last year, according to a Bank of America Merrill Lynch index.

The difference in yield between 10-year notes and Treasury Inflation Protected Securities of similar maturity, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, dropped today to 2.16 percentage points, the narrowest spread since January.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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