Bloomberg News

U.S. 10-Year Break-Evens Up on Greek Vote, Risk-Asset Demand

February 13, 2012

Feb. 13 (Bloomberg) -- The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities reached the highest since August amid optimism that Europe’s debt crisis is improving, boosting investor demand for risk.

Treasuries 10-year note yields traded above 2 percent for a fourth day before fluctuating, amid lingering questions on whether finance chiefs will succeed in pulling Greece back from the brink when they meet in two days after Greek lawmakers approved austerity measures, prompting riots in Athens. Stocks and commodities advanced. Treasury 30-year bond yields briefly fell as the Federal Reserve bought $1.8 billion in longer-term securities.

“We’ve been in a general risk-on atmosphere and that has put a lot of steam in break-evens, which have been on a one-way move this year,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, one of 21 primary dealers that trade with the Fed. “Positive news of out Europe aids the move, and inflation expectations should continue to rise as the fundamentals point to even higher break-evens.”

The difference between yields on 10-year TIPS and comparable Treasuries, a gauge of trader expectations for consumer prices during the life of the debt known as the break- even rate, was 2.23 percentage points 5:05 p.m. in New York. It reached 2.25 percentage points, the most since Aug. 15.

Yield Swings

Yields on 10-year notes were little changed at 1.97 percent in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 traded at 100 7/32. The yield fell to as low as 1.96 percent and traded as high as 2.03 percent.

The Standard & Poor’s 500 Index increased 0.7 percent and the Thomson Reuters/Jefferies CRB Index of raw materials added 0.6 percent.

The Treasury’s lengthening of the average maturity of U.S. debt may help shore up its credit quality and depress bond yields amid contained inflation, according to Steve Lear of J.P. Morgan Asset Management. U.S. debt securities are due in 62.8 months on average, the longest since 2002 and up from a low of 49 months in 2009, according to data compiled by Bloomberg.

“The risk of a Treasury-yield rise comes less from inflation and more from the potential for investors to attach a credit premium to Treasury bonds,” Lear, deputy chief investment officer of fixed income in New York at the unit of JPMorgan Chase & Co., said Feb. 10 in a telephone interview.

Bearish Survey

Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, maintained their bearish stance on Treasuries. Ried’s index on the market outlook through June slid to 44 for the week ended Feb. 10 from 45 the previous week. A figure below 50 shows investors expect U.S. government debt to decline.

U.S. government bonds have lost 0.7 percent in February, following a 9.8 percent gain in 2011, according to a Bank of America Merrill Lynch index.

The Greek parliament’s backing “is a crucial step forward toward the adoption of the second program,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today. “I’m confident that the other conditions, including for instance the identification of the concrete measures of 325 million euros ($430 billion), will be completed by the next meeting” of finance ministers.

Greek Talks

“The only thing that can temper Treasuries is a lack of drama out of Europe, but we are getting plenty of drama,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed- income assets. “The Greece situation is weird because capital markets are focused on the austerity while the Greek population is focused on what the plan will mean for employment. Both are fraught with pain.”

Greek police said as many as 45 buildings and shops were set on fire and 67 people arrested during street protests against austerity measures in central Athens yesterday and overnight.

The Fed purchased Treasuries due from 2036 to 2041 today as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs.

“There are still buybacks, which is helping the Treasuries, and the bond market has been less convinced than the stock market in the recovery and more convinced that the Fed will stay accommodative and that inflation will stay in check,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York.

Sales at U.S. retailers gained 0.8 percent last month after a 0.1 percent increase in December, according to the median forecast of 79 economists surveyed by Bloomberg News before the Commerce Department report tomorrow. Labor Department data on Feb. 3 showed the jobless rate unexpectedly fell in January to 8.3 percent, the lowest since February 2009.

--With assistance from John Detrixhe in New York. Editors: Paul Cox, Kenneth Pringle

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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