Bloomberg News

U.S. 10-Year Yield Touches 6-Week Low on Europe Crisis Concern

November 24, 2011

Nov. 23 (Bloomberg) -- Treasury 10-year yields touched a six-week low amid speculation that the European debt crisis is slowing global growth, underpinning demand for safe assets.

A $29 billion sale of U.S. seven-year securities, is poised to draw a record low yield after rates dropped to the last ever at the five-year auction yesterday, wrapping up $99 billion of note sales this week. German government bonds slid after the nation missed its maximum sales target at a bund auction by 35 percent, sending 10-year yields higher than similar-maturity Treasuries.

“It doesn’t look like Europe is going to have any type of solution anytime soon, and until they do there will continue to be a major cloud over the growth outlook and will keep interest rates low for a long time,” said Gary Pollack, head of fixed- income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion in bonds. “Equity prices have been leaking lower, and as a result there is a continued flight to quality bid into Treasuries.”

The U.S. 10-year yield was little changed at 1.92 percent at 11:42 a.m. in New York, according to Bloomberg Bond Trader prices. The rate earlier dropped to 1.88 percent, the lowest level since Oct. 6. The 2 percent note maturing in November 2021 was at 100 23/32.

The MSCI All Country World Index of stocks slid for an eighth day, declining 1.9 percent. The Standard & Poor’s 500 Index dropped 1.9 percent.

Note Auction

The seven-year notes being sold today yielded 1.43 percent in pre-auction trading, compared with 1.791 percent at the previous sale of the securities on Oct. 27. The record low was 1.496 percent on Sept. 29.

The five-year notes auctioned yesterday drew a record low yield of 0.937 percent. Investors at the two-year sale Nov. 21 bid for 4.07 times the amount of debt available, the most ever.

European industrial orders declined the most in almost three years in September, led by Germany and France, a regional report showed today. Orders in the 17-nation euro region slid 6.4 percent from August, when they rose 1.4 percent, the European Union’s statistics office said.

“The market is trying their best to price in a concession in front of the seven-year auction, but we remain near fairly low yield levels as fear-driven flows from Europe remains the dominant story,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Federal Reserve. “Seeing as there is no magical cure for Europe, and rumors continue to circulate, any selloff will be capped.”

German Bonds

Germany’s bund auction shows the nation is not immune to investors’ increasing aversion to European debt, Frank Schaeffler, a lawmaker from Chancellor Angela Merkel’s coalition said today in Berlin.

Ten-year bund yields rose 22 basis points to 2.14 percent, climbing above Treasury rates. Investors demanded a 22 basis- point premium to hold the German securities instead of their U.S. counterparts, compared with a 12-month average of 15 basis points in Germany’s favor.

The failure of the so-called U.S. deficit reduction supercommittee to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

“As well as the euro-region crisis, we have the U.S. supercommittee that seems to have failed and that means there will be automatic cuts in spending which will weigh on growth, playing into strong demand for Treasuries,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich.

Inflation Bets

Traders have cut bets on inflation this month, yields show.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, narrowed to 1.92 percentage points from 2.08 percentage points on Oct. 31. The five-year average is 2.04 percentage points.

Treasuries weakened after reports showed U.S. durable goods orders at factories fell less than forecast in October and weekly jobless claims remained lower than 400,000.

Bookings for durable goods meant to last at least three years declined 0.7 percent, less than forecast, after a 1.5 percent drop the prior month that was more than twice as large as originally reported, data from the Commerce Department showed today in Washington.

Economic Indicators

Applications for jobless insurance increased 2,000 in the week ended Nov. 19 to 393,000, Labor Department figures showed today in Washington. Economists forecast 390,000 claims, according to the median estimate in a Bloomberg News survey

Gross domestic product climbed at a 2 percent annual rate from July through September, down from a previous estimate of 2.5 percent, the Commerce Department said yesterday.

“Expectations are still for upside into the yearend, given the uncertainties in Europe and the broader economic and policy risks risk facing the U.S.” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Treasuries have been, and could very well continue to be, the outperforming asset class. Yields are going to go lower.”

Treasuries returned 9.3 percent this year while German bunds rallied 8.2 percent, according to Bank of America Merrill Lynch data. U.S. company debt advanced 5.3 percent, the figures show. The MSCI All Country World Index has handed investors an 11 percent loss.

Treasury trading is scheduled to close worldwide tomorrow for the U.S. Thanksgiving holiday.

--Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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