Bloomberg News

U.S. Treasuries, Dollar Gain as Stocks Fall on Economic Concern

July 05, 2011

July 5 (Bloomberg) -- Treasuries rose, snapping a five-day losing streak, while the U.S. dollar rose and stocks fell after a Moody’s Investors Service downgrade of Portugal’s debt to junk and lower-than-estimated American factory orders rekindled concern the global economy will slow. Oil and gold surged.

The rally in 10-year U.S. Treasuries drove the yield down 0.06 percentage point to 3.13 percent at 4:14 p.m. in New York, and rates on three-month bills fell below zero for the first time since December 2008. The Dollar Index rose 0.5 percent, and the American currency gained versus 15 of 16 major counterparts. The S&P 500 declined 0.1 percent, erasing a 0.1 percent gain driven by energy producers. Crude jumped 2.1 percent, while gold rose 2 percent.

Moody’s cut Portugal to Ba2 from Baa1, making it the second euro-region country with a non-investment-grade rating. Concern that Greek will default drove stocks, bonds and commodities to the first simultaneous monthly declines since February 2009 in June. Treasuries also climbed today after U.S. factory orders increased at a weaker pace than economists forecast and Moody’s said the Chinese national auditor is understating banks’ loans to local governments by about 3.5 trillion yuan ($540 billion).

“The Moody’s downgrade of Portugal to junk may serve to reignite the same sovereign fears that plagued the markets a couple of weeks ago,” said Andrew Ross, partner and global equity trader at First New York Securities LLC, a New York-based proprietary trading firm that bets on stocks, commodities, currencies and derivatives. “The fear is that Portugal is the next Greece.”

Nothing Worked

Last week, stocks surged worldwide while Treasuries and the U.S. dollar plunged after the Greek parliament approved budget cuts and tax increases that were required for the nation to win bailout funds from the European Union. That wasn’t enough to prevent the monthly losses for equities, bonds and commodities.

Treasuries rose today following the Portugal downgrade and as the deteriorating credit outlook for China’s banks encouraged demand for the safety of U.S. government debt. Three-month bill rates tumbled to negative 0.0051 percent, the first time they dropped below zero since December 2008.

Credit markets are signaling growing concerns that bad loans in China will force the government to bail out banks owed more than 10 trillion yuan ($1.5 trillion) by local authorities. Five-year credit-default swaps on the People’s Republic of China surged by the most in seven months in June, faster than advances in the other so-called BRIC nations of India, Brazil and Russia.

Portugal, Italy

Portuguese government debt didn’t trade following the Moody’s downgrade. During European business hours, yields on the nation’s 10-year notes climbed 10 basis points to 10.49 percent. Yields on Italian 10-year debt increased nine basis points to 4.99 percent after the cancellation of a news conference in which Finance Minister Giulio Tremonti was supposed to detail the government’s planned 47 billion euros ($68 billion) in new austerity measures.

The U.S. Commerce Department said today that orders placed with U.S. factories increased 0.8 percent in May, trailing the 1 percent growth forecast from economists, according to the median projection in a Bloomberg survey. European services and manufacturing slowed more than estimated in June, according to Markit Economics.

“The uncertainty is persisting with regard to the global growth outlook,” said Alex Tedder, who helps manage about $13 billion in global stocks at American Century Investments in New York. “If you’re looking to park cash right now, then the dollar is looking quite cheap and Treasuries are always the safe haven of choice.”

Swiss Franc

The U.S. dollar rose 0.8 percent to $1.4423 per euro, after touching $1.4578 yesterday, the weakest level since June 9. Only the Swiss franc gained among the American currency’s 16 major counterparts, advancing 0.8 percent.

The S&P 500, which surged 5.6 percent last week for the biggest gain since 2009, rose earlier as energy stocks gained. Financial institutions in the measure slumped 0.8 percent, the most among 10 groups. The 0.5 percent gain by energy stocks failed to prevent the index’s decline. The S&P 500 moved 0.5 percent between its intraday low and high, the narrowest range since the index closed at an almost-three-year high on April 29.

Stocks fell globally, sending the MSCI All-Country World Index down 0.2 percent.

Crude oil for August delivery jumped 2.1 percent to a three-week high of $96.89 a barrel. The S&P GSCI Index of 24 commodities rose 1.7 percent. Gold futures climbed 2 percent, the most in five weeks, to $1,512.70 an ounce.

Copper rose to a 10-week high on speculation that cooling growth will allow monetary tightening to slow in China, the world’s largest metals buyer. Futures for September delivery gained 1 percent to $4.3475 a pound. Earlier, the price touched $4.354, the highest since April 27.

--With assistance from Keith Jenkins, Lucy Meakin and Claudia Carpenter in London, Katrina Nicholas and Stephanie Tong in Hong Kong, John Detrixhe, Rita Nazareth, Susanne Walker, Catarina Saraiva and Yi Tian in New York and Pham-Duy Nguyen in Seattle. Editors: Nick Baker, Jeff Sutherland

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Stephen Kirkland in London at skirkland@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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