Bloomberg News

Treasuries Advance for Second Day on China Rates, Europe Turmoil

July 06, 2011

July 6 (Bloomberg) -- Treasuries rose, pushing 10-year note yields to a one-week low, as China’s announcement it will raise interest rates for the third time this year spurred concern that economic growth will slow and discouraged risk demand

U.S. government bonds gained for a second day amid concern Europe’s debt crisis may spread beyond Greece and Portugal. Moody’s Investors Service cut Portugal’s credit rating yesterday to junk status. Treasuries trimmed gains today as U.S. stocks erased losses.

“The China story is obviously a component to the nerves in the market,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “People are held hostage to the headline risks in Europe.”

Ten-year note yields fell one basis point, or 0.01 percentage point, to 3.11 percent at 5:05 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 increased 3/32, or 94 cents per $1,000 face amount, to 100 1/8.

Benchmark 10-year note yields earlier touched 3.07 percent, the lowest level since June 29. Thirty-year bond yields slipped one basis point today to 4.36 percent. Yields on two-year notes, among the most sensitive to changes in interest rates because of their short maturity, traded at 0.42 percent, compared with 0.43 percent yesterday. They earlier fell to 0.41 percent, the lowest since June 28.

Rates on three-month bills increased one basis point to 0.005 percent after dropping below zero yesterday for the first time since 2008.

Negative Rates

One-month bill rates fell to negative 0.01 percent, their first time below zero since June 30. An auction of $28 billion of the securities today drew a yield of zero, the lowest level since January 2010.

The Standard & Poor’s 500 Index rose 0.1 percent after earlier falling as much as 0.5 percent.

The Federal Reserve bought $2.91 billion of Treasuries today due from January 2014 to February 2015, according to the New York Fed’s website. The central bank completed its $600 billion program of debt purchases on June 30 and is now reinvesting maturing assets from its debt holdings as part of its efforts to cap borrowing costs.

China’s one-year deposit rate will rise to 3.5 percent from 3.25 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will increase to 6.56 percent from 6.31 percent. The boosts are aimed at containing inflation.

‘Positive for Treasuries’

“People worry that it would be slightly negative for the world economy if they are trying to slow down growth,” Thomas Roth, senior Treasury trader at Mitsubishi UFJ Securities USA Inc. in New York, said of China’s move. “That’s positive for Treasuries.”

Bonds remained higher after the Institute for Supply Management’s non-manufacturing index fell more than estimated to 53.3 last month, from 54.6 in May, data from the Tempe, Arizona, group showed. A Bloomberg News survey forecast the service- industry gauge would decline to 53.7. Readings greater than 50 signal expansion.

The Fed said after its June 21-22 meeting it expects the economic recovery to pick up after ebbing in the second quarter.

Growth will accelerate to 3.2 percent in the third quarter, from 2.3 percent in the second, according to the median forecast of 68 economists in a Bloomberg News survey.

Ten-Year Yields

Ten-year yields will advance to 3.62 percent by year-end, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Treasuries investors were the most bearish in more than six years in the week ended yesterday as portfolio managers eliminated wagers that the prices of the securities will rise, according to a survey by JPMorgan Chase & Co., one of the 20 primary dealers that trade Treasuries with the Fed.

The net percentage of investors in the survey betting that Treasury prices will increase was zero for the first time since Feb. 14, 2005, the firm said in a release. It was the third such result in the history of the weekly survey, which began in the early 1990s, Srini Ramaswamy, a JPMorgan strategist, said in an interview.

About 75 percent of the clients surveyed were neutral, while 25 percent were short. A short position is a wager the price of a security will fall, while a long position is a bet it will rise. The firm declined to divulge the number of clients in the survey.

Portugal’s Rating

Treasury yields fell yesterday as Moody’s lowered Portugal’s long-term rating to Ba2, two levels below investment grade. The company said in the move stemmed partly from “the growing risk that Portugal will require a second round of official financing before it can return to the private market.”

There is also “the increasing possibility that private- sector creditor participation will be required as a pre- condition,” the ratings company said.

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.

“Portugal serves as a not-so-subtle reminder that even if we get away from the Greece issue, there’s other contagion that isn’t going to go away,” said Kevin Flanagan, chief fixed- income strategist at Morgan Stanley Smith Barney based in Purchase, New York.

--With assistance from Cordell Eddings in New York. Editors: Greg Storey, Dennis Fitzgerald

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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