Bloomberg News

Treasuries Gain as Portugal Cut to Junk; Bill Rates Below Zero

July 05, 2011

July 5 (Bloomberg) -- Treasuries rose, snapping a five-day rout, as Moody’s Investors Service cut Portugal’s long-term government bond ratings to junk, fueling demand for the safety of U.S. government debt.

Rates on three-month Treasury bills fell below zero for the first time since 2008 as Moody’s reduced the ratings to Ba2, from Baa1. The outlook is negative. Treasuries gained earlier after a report yesterday showed deteriorating credit prospects for China’s banks and Standard & Poor’s said a debt-rollover plan for Greece may prompt a “selective default” rating.

“It’s fear and concern over the spillage or contagion” of Greece’s sovereign-debt crisis, said Sean Murphy, a Treasury trader at Societe Generale SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Portugal was on thin ice as well as Greece.”

Yields on 10-year notes dropped six basis points, or 0.06 percentage point, to 3.12 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.125 percent securities maturing in May 2021 increased 1/2, or $5 per $1,000 face amount, to 100 1/32.

Three-month Treasury bill rates tumbled to negative 0.0051 percent in their first descent below zero since December 2008.

“Today people came to the conclusion that this situation in Europe is not going away any time soon,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It extended the bill rates on the flight to quality.”

U.S. 10-year note yields rose on July 1 to 3.22 percent, the highest level since May. Yields on 30-year bonds fell two basis points today to 4.37 percent. Two-year yields slid five basis points to 0.43 percent, the lowest level since June 28.

Portugal Bailout

Portugal won a 78 billion-euro ($113 billion) international bailout in May as it struggles to repair its finances. The Iberian nation joined Ireland and Greece in turning to the European Union and the International Monetary Fund for emergency funding after their budget deficits ballooned.

Treasury 10-year yields climbed the most last week in almost two years, 32 basis points, as Greek lawmakers approved budget cuts needed for a second bailout from the European Union and International Monetary Fund.

The extra yield 10-year notes offer over two-year debt widened to as much as 2.73 percentage points on July 1, the most in two months. It narrowed to 2.69 percentage points today.

Chinese Banks

In a report yesterday, Moody’s said Chinese banks’ loans to local governments are about 3.5 trillion yuan ($540 billion) more than the national audit office’s estimate, and the industry’s credit outlook could decline.

The data spurred speculation the banks will be unable to absorb losses on defaults should property prices drop. Moody’s estimated that local governments’ debt is about a third more than the audit office’s findings last week of 10.7 trillion yuan. Non-performing loans could reach as much as 12 percent of total credit, it said.

“If Chinese banks are having issues right now, they won’t be out buying stocks and securities outside of the country,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York.

Treasuries also rose after S&P said in a statement the rollover plan for Greece that’s serving as the basis for talks between investors and governments may put the debt-strapped nation in default.

“People are saying the Greek-default issue is not off the table yet, so the market is getting a bid,” Franzese said.

‘Less Value’

The rollover proposal would qualify as a distressed-debt restructuring because it offers creditors “less value than the promise of the original securities,” S&P said in a statement.

Banks agreeing to roll their Greek government bonds into new securities may incur impairment charges on debt maturing through June 2014 that they continue to hold, Moody’s said in another report dated yesterday.

Bond bears say yields will rise as the economy improves, damping Treasuries’ refuge appeal. U.S. manufacturing unexpectedly accelerated in June, the Institute for Supply Management reported on July 1.

Treasuries remained higher today after a Commerce Department report showed orders placed with U.S. factories increased 0.8 percent in May, less than the 1 percent forecast in a Bloomberg News survey, from a revised 0.9 percent decline in April.

“It’s an indication that the manufacturing sector is in the process of gaining lost momentum,” said Ward McCarthy, chief financial economist Jefferies & Co. Inc., a primary dealer. “The number is pretty much on track, so we are seeing some hopeful signs the economy will be doing somewhat better in the third quarter.”

Remain in Range

The U.S. 10-year note yield will likely remain in a range of 2.75 percent to 3.5 percent following the end last week of $600 billion of Treasury purchases by the Fed in a round of quantitative-easing to spur the economy, according to Eric Pellicciaro, head of global rates investments at BlackRock Inc. in New York.

“The big-picture view is that you want to remain in bonds,” Pellicciaro said in a Bloomberg Television interview on “Fast Forward” with Julie Hyman. “The deleveraging process that is happening in the private sector is profound and will keep growth rates low and debt issuance low. These are decent things for bonds.”

The central bank said June 22 policy meeting it will continue to reinvest principal payments from its securities holdings to strengthen economic growth. That may mean purchases of as much as $300 billion of government debt over the next year without adding money to the financial system.

--With assistance from Cordell Eddings in New York and Keith Jenkins in London. Editors: Greg Storey, Paul Cox

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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