Bloomberg News

U.S. 10-Year Yields Rise From Almost 2011 Low on Greece Outlook

June 20, 2011

June 20 (Bloomberg) -- Treasury 10-year yields rose from almost the lowest level this year after comments from European and International Monetary Fund officials eased concern Greece’s debt crisis is worsening, reducing U.S. debt’s refuge appeal.

U.S. two-year yields were little changed after falling for the past 10 weeks, the longest rally in a quarter-century. Luxembourg’s Jean-Claude Juncker, who leads the group of euro- area finance ministers, said Greek Prime Minister George Papandreou assured him the government would do everything necessary to ensure delivery of financial aid from the European Union and IMF.

“The market anticipates that Papandreou will gain the support to do that,” said Chris Ahrens, head U.S. rates strategist in Stamford, Connecticut, at UBS AG, one of the 20 primary dealers that trade with the Federal Reserve. “The market is focused like a laser on events in Greece. The big event is still in the foreground.”

Ten-year yields increased one basis point, or 0.01 percentage point, to 2.96 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.125 percent note maturing in May 2021 fell 1/8, or $1.25 per $1,000 face amount, to 101 13/32. The yield, which earlier fell six basis points to 2.89 percent, touched its 2011 low of 2.88 percent on June 16. It has lost 33 basis points since the start of the year.

Two-year note yields were little changed at 0.37 percent after earlier rising to 0.39 percent. They reached a low for the year of 0.34 percent on June 16.

‘Softened Up’

“No one is sure how it will unfold, but there’s a commitment to resolving the issue,” said Sean Murphy, a Treasury trader at Societe Generale in New York, another primary dealer. “The market is coming to its own conclusion that they are going to receive some sort of package, so Treasuries have softened up.”

U.S. government securities rose earlier after European governments failed to agree on releasing a loan to help Greece avoid defaulting on its debt.

Euro-area finance ministers meeting in Luxembourg pushed Greece to pass laws to cut its deficit and sell state assets, and left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July.

Decisions on the next payout and a three-year follow-up package were put off until early next month, ramping up pressure on Papandreou to first deliver budget cuts in the face of domestic opposition.

The IMF is focused on getting Greece’s first bailout program on track, Acting Managing Director John Lipsky told reporters in Luxembourg today. Greece hasn’t approached the agency to ask for additional aid, he said.

2011 Returns

Treasuries have returned 3.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 0.4 percent, while U.K. gilts advanced 3 percent, the indexes show.

The Fed purchased $9.2 billion of Treasuries in its program to acquire $600 billion in U.S. debt under quantitative easing. It bought $4.62 billion due from August 2018 to May 2021 in one operation and $4.58 billion maturing from December 2013 to May 2015 in a second.

The Federal Open Market Committee at a two-day meeting that starts tomorrow is anticipated to leave accommodative language unchanged and is not likely to undertake a new round of quantitative easing.

‘A Non-Event’

“It’s going to be a non-event,” said Steven Ricchiuto, chief economist in New York at the primary dealer Mizuho Securities USA Inc. “There’s not going to be QE3. There’s a greater reluctance to do QE3 because they are not too sure about the value of it, especially since the economy is still struggling.”

The Fed has left its target rate for overnight loans between banks at zero to 0.25 percent since December 2008. Its Treasury-purchase program is scheduled to end this month.

Japan’s biggest bond investors see increasing parallels between the nation’s debt market and Treasuries, indicating that historically low yields in the U.S. have room to fall.

Just as in Japan, deposits at U.S. banks exceed loans, reaching a record $1.45 trillion last month, Fed data show. As recently as 2008, there were more loans than deposits. The gap is also at an all-time high in Japan, where banks use the money to buy bonds, helping keep yields the lowest in the world even though the country has more debt outstanding than America and a lower credit rating.

Paring Growth Estimates

While none of the more-than 40 economists surveyed by Bloomberg expect the U.S. will see two decades of stagnation like Japan, they are paring growth estimates as unemployment remains above 9 percent and the housing market struggles to recover. The IMF cut its forecast for U.S. growth in 2011 for the second time in two months on June 17, bolstering the appeal of fixed-income assets.

U.S. home sales probably dropped in May to the lowest level this year, economists said before a report tomorrow. Purchases of existing houses decreased 5 percent to a 4.8 million annual rate last month, the weakest since October, according to the median forecast in a Bloomberg News survey.

--With assistance from Masaki Kondo in Singapore and Yoshiaki Nohara and Saburo Funabiki in Tokyo. Editors: Greg Storey, 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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