Bloomberg News

Treasuries Fluctuate as Greek Discussions Struggle Over Pensions

February 09, 2012

Feb. 9 (Bloomberg) -- Treasuries fluctuated as negotiations in Greece stumbled over pensions and European finance ministers prepared to hold an emergency meeting, boosting demand for a refuge in U.S. debt.

Yields on 30-year bonds fell from within three basis points of a two-week high before the Treasury Department’s $16 billion auction of the securities today. Yesterday’s offering of 10-year notes drew the lowest demand since November.

“Treasury yields are kept at unrealistically low levels because of ongoing concern about the debt crisis in the euro region,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There are still hurdles ahead as far as the Greek debt situation is concerned, and that will limit a rise in bond yields.”

Yields on 30-year bonds dropped less than one basis points, or 0.01 percentage point, to 3.15 percent at 7:47 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 rose 1/32, or 31 cents per $1,000 face amount, to 99 17/32. The yields touched 3.18 percent yesterday, the highest level since Jan. 23.

Investors should bet for the extra yield investors get for holding 10-year notes instead of two-year debt to widen beyond today’s 175 basis points as economic growth accelerates, according to Schnautz.

Treasury 10-year notes yielded 2 percent, two basis points more than German debt. The European Central Bank held its benchmark interest rate at a record low 1 percent, as forecast by all except two of the 57 economists in a Bloomberg survey.

Greece Uncertainty

Greece’s Finance Minister Evangelos Venizelos said there is still uncertainty on the terms of a 130 billion-euro ($173 billion) rescue package for Greece before today’s meeting of euro-area finance ministers.

“There are issues outstanding that must be resolved by the time the euro group meets,” Venizelos told reporters in Athens after a meeting with Prime Minister Lucas Papademos and European Union and International Monetary Fund officials that ended just before 6 a.m. in Athens.

The U.S. 30-year bonds that investors will bid for today yielded 3.16 percent in pre-auction trading, compared with the record low auction yield of 2.925 percent set in December.

At the previous sale in January, traders submitted offers to buy 2.60 times the amount of available debt, versus the average of 2.66 percent for the past 10 monthly auctions.

Indirect Bidding

Indirect bidders, the group that includes foreign central banks, purchased 31.9 percent of the debt. Direct bidders, non-primary dealers buying for their own accounts, bought 7.2 percent, the least in 10 months.

The U.S. will announce today the size of a 30-year sale of Treasury Inflation Protected Securities scheduled for Feb. 16. The auction will probably be for $10 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance. The money will be so-called new cash because the sale doesn’t coincide with any maturing debt, according to Wrightson.

Company bonds are poised to gain because they offer higher yields than government securities, Anthony Valeri, a fixed-income strategist at LPL Financial LLC in San Diego, wrote in a report dated yesterday.

“Corporate bond sectors have the potential to have the best return in 2012,” according to LPL, which gives investment advice and brokerage services to 12,500 financial advisers.

Corporate Returns

Company debt in the U.S. has returned 2.4 percent this year as of yesterday, according to Bank of America Merrill Lynch data. While U.S. government debt has lost 0.4 percent this year, it has still outperformed U.K. and German securities, which have declined 1.9 percent and 0.8 percent, respectively. TIPS have gained 1.6 percent, the indexes indicate.

The Federal Reserve is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.

The central bank is scheduled to buy as much as $5 billion of securities due from February 2018 to November 2019 today under the plan, according to the New York Fed’s website.

Initial claims for unemployment insurance were little changed last week at 370,000, below last year’s average of 409,000, according to a Bloomberg News survey. U.S. gross domestic product will expand 2.3 percent in 2012, versus 1.7 percent in 2011, another Bloomberg survey shows.

Economic growth is slow enough to make Shinji Kunibe, chief portfolio manager for fixed-income investment in Tokyo at Nissay Asset Management Corp., bullish on Treasuries.

“Yields will gradually decline as developed economies linger at low growth rates,” he said. Kunibe said he may buy if 10-year yields rise past 2 percent. Nissay manages the equivalent of $70 billion.

--Editors: Dennis Fitzgerald, Paul Cox

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@hotmail.com; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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