Bloomberg News

Treasury 10-Year Yields Drop to Record on European Debt Concern

September 06, 2011

Sept. 6 (Bloomberg) -- Treasury 10-year note yields decreased to an all-time low as concern Europe’s sovereign-debt crisis will cripple the region’s financial institutions underpinned demand for the safest assets.

Yields on 30-year bonds touched the lowest level since January 2009 on speculation Federal Reserve Chairman Ben. S. Bernanke may signal in a speech this week that the central bank will purchase longer-duration debt while shedding shorter maturities. Ten-year notes are the most overvalued ever, according to a financial model created by Fed economists that includes expectations for interest rates, growth and inflation. Stocks dropped.

“The fear is that the debt contagion is not abating,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Because of the global stock meltdown, flight to quality came into play. The safest bet would be to jump into dollar-denominated assets, like Treasuries. The Fed will have to do something to stimulate the economy, and the only way to do that is to buy Treasuries.”

The benchmark 10-year note yield was little changed at 1.98 percent at 5:21 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent securities maturing in August 2021 closed at 101 1/4.

Record Low Yields

The 10-year note yields earlier slid to 1.9066 percent, the lowest on record. A gain in 30-year bonds pushed yields down three basis points to 3.27 percent after they fell to 3.18 percent, a level not seen in more than two years. Two-year note yields were little changed at 0.196 percent.

The Standard & Poor’s 500 Index dropped 0.7 percent after earlier declining 2.9 percent. The Stoxx Europe 600 Index lost 0.7 percent after tumbling 4.1 percent yesterday.

Yields on five-year notes gained two basis points to 0.88 percent after a report showed U.S. service industries unexpectedly expanded at a faster pace in August and on speculation the Fed won’t increase holdings of the maturities.

The Institute for Supply Management’s index of U.S. non- manufacturing businesses increased to 53.3 last month, the Tempe, Arizona, group reported. Economists forecast the gauge would drop to 51, according to the median estimate in a Bloomberg News survey. A reading above 50 signals expansion.

The U.S. had zero job growth in August, and the unemployment rate held at 9.1 percent, the Labor Department’s payrolls report showed Sept. 2.

‘More Stable’

“The ISM doesn’t change the downbeat story, but it proves that certain sectors of the economy are more stable than others,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

Longer-term Treasuries led today’s gains as investors speculated the Fed may buy those maturities to support the economy under what is known as Operation Twist.

“Bernanke will not sit around and wait for things to deteriorate,” said Sean Murphy, a trader in New York at Societe Generale SA, a primary dealer. “The market has strengthened the case for him to provide further accommodation. The most viable option for now is the twist.”

The central bank acquired today $730 million of Treasuries maturing from April 2013 to February 2014. The purchases are part of the Fed’s policy to continue to reinvest the proceeds of maturing assets on its balance sheet to prevent a tightening of monetary policy.

Bernanke Address

Bernanke will speak on the U.S. economic outlook Sept. 8 in Minneapolis. Fed officials will gather for a two-day meeting Sept. 20 that was originally scheduled to last one day in order to “allow a fuller discussion” of the economy and the central bank’s possible policy response.

Minneapolis Fed President Narayana Kocherlakota said today in the text of a speech that the U.S. economy didn’t need additional stimulus in August and probably won’t require more easing this month.

The so-called term premium, which Bernanke cited in a 2006 speech in New York as a useful guide in setting monetary policy, was negative 0.51 percent today, compared with an average 0.84 percent for the gauge during this decade through mid-2007. The term premium touched negative 0.55 percent on Sept. 2, the lowest ever according to Bloomberg data beginning in 1976.

“Investors aren’t buying for yield right now,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., a primary dealer. “We are further along in the deleveraging process than we were when the crisis began and people are still willing to buy Treasuries, which tells you that concern over credit globally remains.”

Yield Spread

Demand for longer maturities, which are most sensitive to inflation outlook, caused the extra yield that investors get for buying 10-year notes instead of two-year debt to narrow to 1.78 percentage points, the least since March 2009.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday in Frankfurt that conditions in stock and bond markets are reminiscent of the 2008 financial crisis.

The Swiss franc dropped the most ever against the euro after the central bank imposed a ceiling on the currency’s exchange rate to support the economy and said it will defend the target with the “utmost determination.”

Treasuries have returned 8.1 percent in 2011, heading for their best year since 2008, according to a Bank of America Merrill Lynch index. An index of government bonds around the world has increased 4.8 percent in 2011.

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

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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