Bloomberg News

Treasury Two-Year Yields Approach Record Low on Greece, Fed View

June 25, 2011

June 25 (Bloomberg) -- Treasuries rose, pushing two-year note yields to within a basis point of the record low, on concern Europe’s sovereign-debt crisis is getting worse and as the Federal Reserve cut its forecast for U.S. growth.

Two-year notes gained for an 11th straight week before next week’s U.S. auctions in the longest rally since the 1980s as the central bank said it would maintain record monetary stimulus after its $600 billion of debt purchases ends June 30. Benchmark 10-year note yields fell to this year’s low on speculation Greece will struggle to pass austerity measures.

“There’s absolutely no immediate relief that can occur that can lift the accelerator off the floor in buying Treasuries,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The minute you knock down one piece of bad news, there’s no way to shrug your shoulders and say thank God that’s over because there’s going to be something else coming.”

Yields on two-year notes slid five basis points, or 0.05 percentage point, to 0.33 percent, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 increased 3/32, or 94 cents per $1,000 face amount, to 100 10/32.

The two-year note yields fell yesterday to 0.32 percent, the lowest level since touching a record low 0.3118 percent on Nov. 4. The last time the yields fell for 11 straight weeks was in September through November 1984, when the U.S. central bank had switched to cutting from raising interest rates.

Ten-Year Notes

Yields on 10-year notes fell for a sixth week, dropping eight basis points. They slid yesterday to 2.85 percent, the lowest level since Dec. 1.

The benchmark notes extended gains yesterday after yields dropped below the 2.88 percent level where the securities had found resistance three times since June 16, according to Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of the 20 primary dealers that trade with the central bank. Resistance is a level where sell orders may be clustered.

“We’ve decisively rallied through that level,” Prakash said. “That is a big deal. This rally can probably reach 2.75 percent.”

Italian 10-year bonds fell this week, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since the euro was introduced in 1999. Moody’s Investors Service said this week it may cut the ratings of Italian banks.

The difference in yield widened to 2.14 percentage points as Italy’s 10-year yield advanced to 4.98 percent. Greece’s 10- year yield fell to 16.78 percent.

Greece Austerity

For Greece’s Prime Minister George Papandreou, the next hurdle is to shepherd 78 billion euros ($111 billion) of austerity measures through Parliament. The program was endorsed this week by experts from the European Commission, the European Central Bank and the International Monetary Fund.

“All eyes are on Europe,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies Group Inc., a primary dealer. “We’ve seen a steady grind to lower yields without a significant pullback for several weeks now. Investors are just waiting for the storm to pass until there is some clarity.”

The U.S. economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, the Fed said following its June 21-22 policy meeting.

Gross domestic product grew at a 1.9 percent annual rate from January through March after expanding at a 3.1 percent pace during the last three months of 2010, revised figures from the Commerce Department showed yesterday. The government reported in May a quarterly expansion of 1.8 percent.

Fisher’s View

Economic growth will pick up in the second half while remaining slow, and the Fed will maintain its record asset holdings for an “appropriate” period, according to Dallas Fed President Richard Fisher.

“It’s going to take quite some time to achieve a glide path that brings unemployment down significantly,” Fisher said yesterday in a Bloomberg Television interview from Dallas. “It’s a slow recovery, and it’s going to continue to be slow.”

President Barack Obama will meet with Senate Democratic leader Harry Reid and Republican leader Mitch McConnell next week in an effort to revive talks on the budget and deficit.

The parties are at an impasse on finding a way to cut at least $1 trillion and raise the nation’s $14.3 trillion debt ceiling before an Aug. 2 deadline. House Majority Leader Eric Cantor and the second-ranking Senate Republican, Jon Kyl, walked away from a negotiating effort led by Vice President Joe Biden.

The government will sell $35 billion in two-year notes, the same amount of five-year debt and $29 billion of seven-year securities on three consecutive days beginning June 27, the Treasury Department announced this week.

--With assistance from Michael McKee in Dallas and Emma Charlton in London. Editors: Dennis Fitzgerald, Greg Storey

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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


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