Bloomberg News

Treasury Rally Pushes Yields to Record Lows on Slowing Economy

August 20, 2011

Aug. 20 (Bloomberg) -- Treasuries surged, pushing yields on five-, seven- and 10-year notes to historic lows, as investors sought a refuge on concern U.S. growth is slowing and Europe’s sovereign-debt crisis is getting worse.

Yields on 30-year bonds dropped this week the most since 2008 after the Federal Reserve said earlier in August it would keep borrowing costs unchanged until at least mid-2013 and Standard & Poor’s lowered the top U.S. credit rating. The rally in bonds indicates Fed Chairman Ben S. Bernanke may signal at a conference on Aug. 26 in Jackson Hole, Wyoming, that additional measures to lift the economy are needed.

“Clearly growth continues to be extremely weak,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “There’s still concern for what’s going on in Europe. Despite the downgrade by S&P, investors are looking for safety, and that’s clearly in the Treasury market.”

Yields on 30-year bonds dropped this week 34 basis points, or 0.34 percentage point, to 3.39 percent, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 6 9/32, or $62.81 per $1,000 face amount, to 106 23/32.

Benchmark 10-year note yields fell below 2 percent for the first time, tumbling on Aug. 18 to a record low 1.9735 percent. Five- and seven-year note yields touched all-time lows of 0.79 percent and 1.31 percent. Two-year note yields were little changed at 0.19 percent.

U.S. Debt Returns

Treasuries have returned 2.3 percent since S&P lowered the U.S. credit rating on Aug. 5, and are up 3.4 percent this month. It’s the biggest gain since government securities increased 3.5 percent at the depths of the financial crisis in December 2008, according to Bank of America Merrill Lynch’s U.S. Treasury Master Index.

“It’s capitulation that growth will be subpar,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the U.S. central bank. “In 2008, there was optimism that we would have growth by now.”

U.S. stocks tumbled this week, with the Standard & Poor’s 500 Index dropping 4.7 percent in a fourth straight weekly slump. Gold rose to a record above $1,880 an ounce. The dollar dropped to post-World War II low against the yen.

Philadelphia Manufacturing

Yields on 10-year notes tumbled for a fourth week as reports showed manufacturing in the Philadelphia region unexpectedly contracted in August by the most in more than two years and consumer prices excluding food and energy rose last month at the slowest pace since April.

The U.S. economy climbed at a 1.3 percent annual rate last quarter following a 0.4 percent gain in the first three months of the year that was less than earlier estimated, the Commerce Department reported last month.

Bank of America Merrill Lynch’s MOVE index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two- to 30 years, rose to 100.30 yesterday, up from 87.80 on Aug. 17.

Fixed-income securities from the U.S. to Europe and Asia have returned 1.9 percent on average in August, the most since gaining 2.4 percent in December 2008, according to Bank of America Merrill Lynch’s Global Broad Market Index.

Bond Yields

Yields as measured by the index, which covers more than 19,000 government, corporate, asset-backed and other types of securities, have fallen to 2.25 percent, from this year’s high of 3.03 percent in April.

The Treasury will sell $35 billion in two-year notes, the same amount of five-year debt and $29 billion of seven-year securities in auctions beginning Aug. 23. The amounts are the same as last month’s offerings.

The European Commission said it may present draft legislation on euro bonds to help contain the debt crisis when completing a report on the feasibility of common debt sales. The commission, the EU’s regulatory arm in Brussels, earlier this year opposed such a step because of German-led objections.

“The report will, if appropriate, be accompanied by legislative proposals,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a written response to a European Parliament question.

Treasuries rallied earlier this week after Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy dismissed calls for the issuance of euro bonds that would allow borrowing on behalf of all 17 euro states.

European Banks

U.S. regulators are stepping up scrutiny of American operations of Europe’s largest banks on concern the euro region’s sovereign-debt crisis may lead to funding problems, the Wall Street Journal reported Aug. 18. The New York Fed has been holding talks with the lenders and sought information about their access to funds, said the newspaper, citing people it didn’t identify.

New York Fed President William C. Dudley said in response to audience questions after an address in Newark, New Jersey, that the central bank always keeps an eye on the performance of U.S. and foreign banks, not monitoring one group more than the other.

Bernanke heads this week to Jackson Hole, where he indicated in August 2010 that the central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases may be warranted if growth slows. Two months later, the Fed announced a $600 billion second round of U.S. debt purchases to support the recovery that ended in June.

‘At Worst, Mixed’

Dudley said yesterday in remarks in Lyndhurst, New Jersey, that America’s economic performance is “at worst, mixed,” with negative news offset by loosening credit, firmer retail sales and stronger bank balance sheets.

The extra yield Treasury investors get to hold 30-year bonds instead of two-year notes fell this week to 320 basis points, the narrowest on a closing basis since September 2010.

“Realizing that global economic growth will continue to be marked down compared to what people were expecting, that we are seeing no inflation and that central banks are keeping rates low, investors have every incentive to grab yield wherever they can, and this means buying further out the Treasury curve,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas SA, a primary dealer.

--With assistance from Cordell Eddings in New York. Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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