Bloomberg News

Treasuries Hold Gain as Spain Credit Cut Spurs Demand for Safety

October 14, 2011

Oct. 14 (Bloomberg) -- Treasuries held gains from yesterday after Spain had its long-term sovereign-debt rating cut by Standard & Poor’s, increasing investor appetite for the relative safety of U.S. government securities.

Treasuries returned 4 percent in the past three months as of yesterday, according to Bank of America Merrill Lynch indexes, as European officials struggled to contain a debt crisis that is threatening to curb global economic growth. The MSCI All Country World Index of stocks tumbled 11 percent in the period. S&P lowered Spain’s rating to AA- from AA and the outlook is negative, the company said in a statement.

“The flight to quality will continue,” said Hiromasa Nakamura, an investor in Tokyo for Mizuho Asset Management Co., which oversees the equivalent of $43 billion and is a unit of Japan’s second-largest bank. “European turmoil is still going on.”

Benchmark 10-year yields were little changed at 2.18 percent as of 7 a.m. in London, according to Bloomberg Bond Trader prices. The 2.125 percent security maturing in August 2021 changed hands at 99 1/2.

The rate will fall to 1.7 percent by year-end, said Nakamura, who correctly predicted the rally that sent yields to a record low of 1.67 percent on Sept. 23.

Fed Operation

The Federal Reserve is scheduled to buy $4.25 billion to $5 billion of Treasuries maturing from November 2019 to August 2021 today, according to the central bank website, as part of its plan to keep borrowing costs down.

Japan’s 10-year bonds rose for the first time in six days, pushing the rate down one basis point to 1.01 percent.

“We see heightened risks to Spain’s growth prospects,” S&P said in its statement. “The financial profile of the Spanish banking system will, in our opinion, weaken further.”

Europe’s debt crisis has pushed Greece to the brink of default, threatened to curb world economic growth and raised speculation the 17-nation euro won’t last in its current form.

U.S. yields have risen from this year’s lows as the American economy showed signs of improvement.

A Commerce Department report today will say retail sales climbed 0.7 percent in September from August, the most in six months, according to the median forecast in a Bloomberg News survey of analysts.

“Yields are going to be higher by the end of the year,” said Peter Jolly, the head of market research in Sydney at the investment-banking unit of National Australia Bank Ltd., the South Pacific nation’s largest lender as measured by assets. “Treasuries look pretty expensive.”

Ten-year notes yield about negative 1.62 percent after accounting for inflation as measured by the consumer price index. The five-year average is positive 1.44 percentage points.

Inflation Outlook

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, has risen to 1.89 percentage points from this year’s low of 1.67 percentage points set last month. The five-year average is 2.05 percentage points.

The 10-year yield will be at 2.14 percent by Dec. 31 and 2.88 percent at the close of 2012, according to a Bloomberg survey of banks and securities companies in which the most recent forecasts are given the heaviest weightings.

BlackRock’s Bet

BlackRock Inc., the world’s biggest money manager, is betting the U.S. will avoid a severe recession, said Rick Rieder, chief investment officer for fundamental fixed income at the New York based firm. The company has been buying Italian debt and the bonds of financial firms in the U.S. and Europe, he said.

“For the next couple of years, we’re going to go through modest growth in the developed world,” Rieder said yesterday in an interview with Erik Schatzker on Bloomberg Television’s “Inside Track.”

Treasuries advanced yesterday as concern that Europe’s debt crisis will threaten the global economy spurred demand at a $13 billion sale of 30-year bonds.

The securities drew a record-low yield of 3.12 percent, compared with a forecast of 3.166 percent in a Bloomberg News survey of eight of the Fed’s 22 primary dealers. The bid-to- cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.94, the most since March.

“It was a very strong auction and gives you indication of which way sentiment is in the broader market, and that is away from risk into safe assets,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, which as a primary dealer is obligated to bid in U.S. debt auctions.

--With assistance from Cordell Eddings and Daniel Kruger. Editors: Benjamin Purvis, Nate Hosoda

To contact the reporter on this story: Wes Goodman in Singapore at

To contact the editor responsible for this story: Rocky Swift at

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