Bloomberg News

U.S. 10-Year Yield Under 2% Amid More Greek Debt Package Delays

February 15, 2012

Feb. 15 (Bloomberg) -- Yields on benchmark 10-year Treasury notes traded below 2 percent for a fourth day as speculation a Greek aid package could be delayed until after April elections added to demand for safe assets.

U.S. debt fell earlier earlier as People’s Bank of China Governor Zhou Xiaochun said in Beijing that his nation would participate in the resolution of Europe’s sovereign-debt crisis. Foreign investors held 47.6 percent of outstanding public Treasury debt as of December, the smallest proportion since October 2006, Treasury data show. The Federal Reserve will release minutes from the Jan. 24-25 policy meeting at 2 p.m.

“The Greek situation and the slowdown of Europe tells us that the worst is not behind us yet,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Geopolitical risks are high. That’s where the flight to quality comes in.”

Yields on 10-year notes fell two basis points, or 0.02 percentage point, to 1.91 percent at 12:27 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 rose 6/32, or $1.88 per $1,000 face amount, to 100 25/32. Yields reached as low as 1.91 percent and as high as 1.96 percent.

Yield Difference

The difference between the yield on the two-year note and the 10-year security, the so-called yield curve, dropped to 1.65 percentage points today, the least since Feb. 2. A narrowing yield curve suggests investors anticipate slow economic growth and inflation.

The yield on the two-year note today reached 0.29 percent, matching its 200-day moving average, from last year’s low of 0.14 percent. The rise in the yield creates a buying opportunity, according to Daiwa Asset Management Co.

“This is a good chance to buy,” said Tsutomu Komiya, a bond investor at Daiwa, which oversees the equivalent of $118.2 billion and is a unit of Japan’s second-biggest brokerage. “The upside risk is limited” for the two-year rate, he said.

The Treasury is scheduled to sell $9 billion of 30-year Treasury Inflation Protected Securities tomorrow and is also due to announce the size of two-, five- and seven-year auctions for next week.

Greek Talks

European finance ministers canceled a Brussels meeting slated for today and will hold a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($170 billion) along with about 100 billion euros of debt relief from private bondholders. Greece needs the money to make a 14.5 billion-euro bond payment on March 20.

Greece said that Europe’s wealthier countries are “playing with fire” by toying with the idea of expelling it from the 17- nation euro area as talks over a second aid program ran into new obstacles. Finance Minister Evangelos Venizelos leveled the accusation after a decision slated for tonight was postponed until Feb. 20 at the earliest.

“There’s been a lot of chatter out of Europe that the Greek bailout may be delayed,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That uncertainty has added to the bid for Treasuries.”

Manufacturing in the New York region expanded in February at the fastest pace since June 2010.

Factory Pace

The Fed Bank of New York’s general economic index, rose to 19.5 this month from 13.5 in January. The median forecast of economists in a Bloomberg News survey was for a rise to 15. Readings higher than zero signal expansion among companies in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

Net buying of long-term equities, notes and bonds totaled $17.9 billion during the month compared with net purchases of $61.3 billion the previous month, the Treasury Department said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $87.1 billion in December compared with net buying of $42.9 billion the previous month.

China, the largest foreign lender to the U.S., decreased its holdings of Treasury securities $31.9 billion, or 2.8 percent, to $1.1 trillion, the lowest since June 2010. Its position in longer-term notes and bonds also fell by 2.8 percent or $32.5 billion to $1.1 trillion, the least since June 2010. China increased its position in shorter-term bills by $600 million to $2.9 billion.

Fed Sales

The Fed sold $8.6 billion in Treasuries maturing from December 2013 to March 2014 today under its plan to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to reduce borrowing costs further and counter risks of a recession.

The central bank unexpectedly said on Jan. 25 that benchmark interest rates will stay low until at least late 2014. The yield on the 10-year note dropped seven basis points that day as the Fed said growth in U.S. gross domestic product centered around 2.2 percent to 2.7 percent, down from 2.5 percent to 2.9 percent in November.

Most policy makers expect inflation measured by the personal consumption expenditures index between 1.4 percent to 1.8 percent, down from 1.4 percent to 2 percent in November.

Fed Bank of Dallas President Richard Fisher said more central-bank easing might backfire and that Congress and the Obama administration should streamline tax and regulatory policies to spur long-term job growth.

“No amount of monetary accommodation will change the pathology” businesses face, Fisher said today in a speech in San Marco, Texas. “Excessive monetary accommodation might only add a further dosage of angst, fueling fears of future inflation.”

--With assistance from Daniel Kruger in New York and Wes Goodman in Singapore. Editors: Paul Cox, Greg Storey

To contact the reporter on this story: 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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