Bloomberg News

Treasury Yield 3 Basis Points From Record Low on Greece Outlook

September 11, 2011

Sept. 12 (Bloomberg) -- Treasury yields were three basis points above a record low as speculation Germany is preparing for a Greek default drove demand for the safest assets.

Investors cut bets on inflation before reports this week economists said will show U.S. retail sales and consumer-price gains slowed in August. The government is scheduled to sell $32 billion of three-year notes today, $21 billon of 10-year debt tomorrow and $13 billion of 30-year bonds on Sept. 14.

“I’m a little bullish” even following the plunge in yields, said Shun Totani, a senior fund investor for Tokyo-based Asahi Life Asset Management Co. “Economic conditions are getting worse in the U.S. and Europe.” Asahi Life Asset oversees the equivalent of $8.9 billion in its advisory and investment management businesses, according to its website.

Benchmark 10-year yields were little changed at 1.92 percent as of 11:43 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The price of the 2.125 percent note due in August 2021 was 101 26/32.

The record low was 1.8942 percent set Sept. 9. U.S. seven- year yields dropped to 1.3058 percent today in early Asian trading, the least based on Federal Reserve data that began in 1969, before climbing to 1.34 percent.

Yield Gap Narrows

Demand for Treasuries has narrowed the extra yield that investors get from 10-year notes versus the top of the Federal Reserve’s target range for overnight loans to 1.67 percentage points, the least since 2008.

“The market seems to be driven by fear,” said Roger Bridges, who oversees the equivalent of $15.6 billion of debt as the Sydney-based head of bonds at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. Yields have fallen enough that they no longer offer value, he said.

Japan’s 10-year note yielded 0.99 percent, versus this year’s low of 0.97 percent set Aug. 19.

Members of Chancellor Angela Merkel’s government are discussing how to strengthen German banks in case Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, officials said Sept. 9.

U.S. retail sales rose 0.2 percent in August from July, the slowest pace in three months, according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the figure Sept. 14.

Consumer prices increased 0.2 percent, following a 0.5 percent gain in July, economists said before the Labor Department report Sept. 15.

Inflation-Linked Debt

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed for a second day to 1.97 percentage points. The average over the past five years is 2.06 percentage points.

Returns on inflation-linked bonds fell below those of government debt by the most in almost three years as a world economic slump makes it less likely that easy monetary policies will trigger spiraling consumer prices.

Global sovereign debt gains are 1.3 percentage points higher than on so-called linkers since the end of July, according to Bank of America Corp. indexes. The difference is the most since November 2008. The gap in yields for these bonds on Sept. 9 indicated investors anticipated an annual global inflation rate of 1.35 percent, down from 1.86 percent four months earlier.

Stimulus Package

From Australia to the U.K. to the U.S., central bankers are cutting inflation estimates, giving officials scope to try to boost growth rates and employment. President Barack Obama presented a $447 billion stimulus package to a joint session of Congress last week. The European Central Bank left interest rates unchanged Sept. 8, saying economic prospects had worsened.

“The inflation-linked debt market is confirming signals from pretty much all other capital markets about concerns over the outlook for European and U.S. economic growth,” said Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., which manages $1.3 trillion, in an interview on Sept. 8. “The concerns which the market generally shared over the first half of 2011 about the potential resurrection of inflation in so-called advanced economies have subsided.”

--With assistance from By Liz Capo McCormick and Daniel Kruger in New York. Editors: Garfield 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: Rocky Swift at rswift5@bloomberg.net


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