Bloomberg News

U.S. 2-Year Notes Rise a 10th Week as Greece Spurs Refuge Demand

June 17, 2011

June 17 (Bloomberg) -- Treasury two-year notes rose for a 10th consecutive week of advances in what is the longest rally in 25 years on concern Greece will struggle to avoid the European Union’s first default.

Yields on 10-year notes fluctuated today after Germany’s Chancellor Angela Merkel signaled willingness to compromise with the European Central Bank on a rescue for Greece and Moody’s Investors Service said it may cut Italy’s bond ratings. Yields on 10-year notes had dropped the most in the past two days since March on concern Europe’s sovereign-debt turmoil is worsening.

“The market will firm up going into the weekend because of uncertainty,” said Sean Murphy, a Treasury trader in New York at Societe Generale, one of the 20 primary dealers that trade with the Federal Reserve.

Yields on two-year notes slid 0.5 basis point, or 0.005 percentage point, to 0.375 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security due in May 2013 increased less than 1/32, or 31 cents per $1,000 face amount, to 100 7/32.

Earlier today the two-year note yield increased two basis points to 0.40 percent. They touched 0.33 percent yesterday, the lowest level since Nov. 5. The record low of 0.3118 percent was set the day before that. The last time two-year note yields dropped for 10 straight weeks was in February to April 1986.

Yields on 10-year notes gained two basis points today after earlier rising five basis points. They have dropped three basis points this week and fell yesterday to 2.88 percent, the lowest level since Dec. 1. They slid 17 basis points in the past two days, the most since the period ended March 16.

Treasury Volatility

Volatility of U.S. debt was the highest in two months, according to Bank of America Merrill Lynch’s Move index. The gauge, measuring price swings based on over-the-counter options maturing in two to 30 years, rose to 87.90 yesterday, the most since April 8.

“The market has a very short-term span and could race back up to overnight highs if something happens in Greece,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, an institutional-investor brokerage.

Moody’s Investors Service said Italy’s credit ratings may be reduced because of economic growth challenges, risks associated with efforts to reduce debt and the potential for higher borrowing costs.

The nation’s Aa2 local and foreign currency government bond ratings were placed under review for a possible downgrade.

‘Vienna Initiative’

Bonds fell earlier today as Merkel told reporters in Berlin at a press conference with French President Nicolas Sarkozy that “we would like to have a participation of private creditors on a voluntary basis” regarding aid for Greece.

Her comments indicate reconciliation of Germany’s insistence that investors help bail out Greece with ECB warnings backed by France that any compulsory move risked a default.

“The aim is involvement of the private sector on a voluntary basis, and for that the Vienna Initiative, as it’s called, is a good basis,” Merkel said. “I think we can achieve something on this basis.”

Adopting the Vienna plan, used during the financial crisis of 2009 for eastern European units of banks, would involve encouraging creditors to roll over expiring bonds, buying time for Greece until its austerity program shows results or until a permanent European Stability Mechanism rescue fund takes effect in mid-2013. A rollover involves reinvesting the proceeds from maturing bonds in new securities.

Leading Indicators

Treasuries have rallied this quarter, pushing 10-year note yields down 50 basis points, on economic reports showing a slowdown in global growth as well as concern Europe is struggling to contain its debt crisis.

The Conference Board’s leading indicators advanced 0.8 percent in May after a 0.4 percent drop in the previous month, the New York research group reported today. The median forecast of 51 economists in a Bloomberg News survey was for a 0.3 percent increase in the gauge of the U.S. outlook for the next three to six months.

“The leading indicators seem to be one of the first positive economic data that we’ve had in a while,” Rogan of Guggenheim Partners said. “The market has priced in uncertainty in Europe and poor economic data in the U.S.”

The Reuters/University of Michigan’s preliminary index of consumer confidence dropped more than projected to 71.8 this month from 74.3 in May. The median forecast of economists was for a decrease to 74.

IMF Estimate

The Federal Reserve purchased $1.926 billion of Treasury Inflation Protected Securities maturing from July 2013 to February 2041 today under the $600 billion second round of quantitative easing expiring this month.

The International Monetary Fund cut its forecast for U.S. growth in 2011 for the second time in two months, warning that further setbacks pose growing threats to the world economy, along with potential contagion from Europe’s debt crisis.

The U.S. economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April, the IMF said, citing higher commodity prices and bad weather in the first quarter and a weak housing market.

--With assistance from Ye Xie in New York. Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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