Bloomberg News

Treasuries Gain as Europe Debt Concern Spurs Demand for Safety

July 19, 2011

July 19 (Bloomberg) -- Treasuries rose, pushing benchmark yields to within 10 basis points of the lowest this year, as Europe’s spreading debt crisis fueled demand for the relative safety of U.S. government debt.

The extra yield investors demand to buy 30-year Treasuries instead of five-year notes was 2.86 percentage points, after expanding to 2.87 percentage points yesterday, the widest since Nov. 15. Investors are more reluctant to load up on 30-year bonds as U.S. officials struggle to reach agreement on how to avoid a default.

“European sovereign risk pushed money to the U.S. in a flight to quality,” said Kei Katayama, leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., which oversees the equivalent of $62.7 billion. “Within the U.S., the situation of the debt ceiling is hurting long bonds. There is a risk of a credit-rating cut.”

The 10-year yield declined two basis points to 2.91 percent as of 7:06 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 rose 6/32, or $1.88 per $1,000 face amount, to 101 27/32.

The rate declined to 2.81 percent on July 12, which is 2011’s low, compared with the 10-year average of 4.06 percent. Katayama said he is favoring shorter maturities among his Treasury holdings.

Japan’s 10-year yield dropped 1.5 basis points to 1.065 percent. It fell to 1.06 percent today, the least since November, as the yen’s strength dimmed the earnings outlook for exporters. The currency traded at 79.02 per dollar after rising to 78.47 on July 14, the most since the post-World War II high set March 17.

EU Meeting

European government leaders plan to gather July 21 in Brussels to discuss the financial stability of the euro area. Greece is struggling to avoid a default, while investors concerned at debt levels in Italy and Spain sent bond yields in those nations to euro-area records.

Investors scooped up German bonds, pushing 10-year rates down to 2.65 percent yesterday, the lowest close in seven months. U.S. 10-year notes yielded 28 basis points more than same- maturity bonds in Germany yesterday, the most since February.

Treasury 30-year rates climbed yesterday as President Barack Obama vowed to veto a Republican proposal to impose mandatory budget cuts. Treasury Secretary Timothy F. Geithner has said the government will run out of options to prevent a default on Aug. 2.

Wider Spread

The U.S. spread will widen further, Ajay Rajadhyaksha and Dean Maki, analysts at Barclays Capital Inc., wrote in a report yesterday. The company is one of the 20 primary dealers authorized to trade directly with the Federal Reserve.

“We expect this trend to continue as the risk of both a fiscal drag arising from the debt limit impasse going beyond August 2 and that of an actual ratings downgrade as a result of the absence of a credible plan remain non-trivial,” the New York-based analysts wrote.

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they will cut the U.S.’s top-level credit ranking should failure to raise the debt limit lead to a default.

“If the government defaults and the debt ceiling isn’t passed, there’s a reticence to hold the long-term debt of any nation that’s going to be in that situation,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada’s RBC Capital Markets, also a primary dealer.

Seeking Gold

Investors seeking a haven have also been buying precious metals. Gold for August delivery rose to a record $1,607.90 an ounce yesterday.

Finaport Investment Intelligence, the Zurich-based money manager that oversees the equivalent of $1.71 billion, is favoring gold while it waits to see how the Fed addresses a slowdown in the U.S. economy, said Hans Goetti, the Singapore- based chief investment officer for Asia.

U.S. housing starts rose 2.7 percent in June from May to an annual pace of 575,000 homes, according to the median forecast in a Bloomberg News survey before today’s Commerce Department report. The rate has tumbled from 2.27 million in January 2006, the peak in the past decade.

The Fed may implement a third round of Treasury purchases, but without a plan to cap borrowing costs, the stimulus would spur demand for higher-yielding assets over government bonds, Goetti said.

“You could argue that that would have inflationary potential,” he said.

The U.S. central bank completed $600 billion of purchases last month, its second debt-buying program. Policy makers may decide to target yields, keeping the 10-year rate at about 2.5 percent, which would support Treasuries, Goetti said.

The Fed is still investing principal payments from its debt holdings into Treasuries, and it plans to buy $500 million to $1 billion of securities due from January 2013 to January 2014 today under the program, according to its website.

--Editors: Nicholas Reynolds, Nate Hosoda

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net


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