Bloomberg News

Treasury Notes Fall a Third Week Amid Greek Bailout Optimism

February 20, 2012

Feb. 18 (Bloomberg) -- Treasury notes fell for a third consecutive week amid speculation Greece will secure an aid package from European leaders, discouraging demand for the safest assets.

Yields increased the past two days as reports showed claims for U.S. jobless benefits unexpectedly dropped last week to a four-year low and an index of U.S. leading indicators rose in January. Demand waned Feb. 16 at a Treasury auction of inflation-protected securities, raising concern yields may rise at next week’s auctions of $99 billion of U.S. notes.

“The theme for the week has been generally improving U.S. economic data and middling optimism over the Greek situation, which has weighed on Treasuries,” said Larry Milstein, managing director in New York of government trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Whether policy makers can get their act together is another question, which means any selloff will be limited.”

Five-year note yields rose four basis points, or 0.04 percentage point, to 0.86 percent, according to Bloomberg Bond Trader prices. The 0.875 percent securities maturing in January 2017 fell 6/32, or $1.88 per $1,000 face amount, to 100 2/32.

Yields on benchmark 10-year notes increased two basis points to 2 percent. Thirty-year bond yields were little changed at 3.15 percent.

Minutes of the Federal Reserve’s last policy meeting on Jan. 24-25 that were released Feb. 15 showed a few members of the Open Market Committee said economic conditions may warrant more asset purchases, or quantitative easing, “before long.” Central bankers adopted a plan to hold interest rates near zero at least through late 2014 to spur growth and reduce unemployment.

Treasury Premium

The euro crisis and the Fed’s accommodative policies have lowered the 10-year note yield by 45 basis points from where it would be otherwise, according to a Goldman Sachs Group Inc. report released yesterday.

Germany, the biggest contributor to euro-area rescues, signaled this week that finance ministers may be ready to back Greece’s second bailout in two years when they meet Feb. 20 in Brussels. After a week of wrangling among euro-area officials, Chancellor Angela Merkel’s government indicated it aims to avoid splitting the timetable of the aid and a writedown of Greek debt to private bondholders and agree to the deal as one package.

“The bond market is trading as if there’s a better than 50 percent probability that a deal will get done,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “The bond market is also showing signs of growth in the U.S. as the rest of Europe may go into recession.”

Inflation Hedge

Investors submitted orders to buy 2.46 times the amount of debt offered at the Feb. 16 sale of 30-year Treasury Inflation Protected Securities, compared with a record 3.06 times at the previous sale. The TIPS were sold at a record-low yield of 0.77 percent, the least since the government began issuing the securities in 1998.

“It’s hard to see inflation of any significant magnitude coming in the U.S. for a while,” Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock Inc., said in an interview yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “The Fed is going to keep moving and keep being accommodative. I think they’re ultimately going to go down the road of QE3. If inflation continues to be tame, then I think they can go down the road and focus on their statutory obligations to keep moving and get to full employment.”

Consumer Prices

The consumer-price index increased 0.2 percent after no change the prior month, the Labor Department reported yesterday in Washington. Economists surveyed by Bloomberg had forecast a 0.3 percent gain. Over the past 12 months, prices climbed 2.9 percent, the smallest year-to-year advance since March 2011.

A measure of traders’ expectations for inflation that is tracked by the Fed has risen this year to 2.55 percent from a low of 2.42 percent in January. The five-year, five-year forward break-even rate, which projects annualized price increases over a five-year period starting in 2017, is below its 2.76 percent average over the past decade.

Applications for unemployment insurance payments decreased 13,000 in the week ended Feb. 11 to 348,000, less than the lowest forecast of economists surveyed by Bloomberg News and the fewest since March 2008, Labor Department figures showed Feb. 16. The median survey estimate projected an increase to 365,000.

Labor Gains

The 0.4 percent increase in the Conference Board’s gauge of the outlook for the next three to six months followed a 0.5 percent rise in December, the strongest back-to-back gains in almost a year. An improvement in the labor market may help deliver the income gains needed to encourage Americans to boost spending.

Assuming nonfinancial corporations are at least as healthy as they have been on average over the last 20 years, spreads should narrow by at least 50 basis points for investment-grade bonds and possibly by 100 basis points for high-yield debt, Rieder wrote in a report on the New York-based company’s website. BlackRock manages $3.51 trillion.

The Bank of America index of U.S. corporate and below- investment-grade bonds yields 2.96 percentage points more than Treasuries. The spread narrowed to 2.95 percentage points on Feb. 14, the least since August.

Measures of Stress

Even so, some measures of stress in global credit markets have stopped easing as the rescue plan for Greece still threatens to unravel. The U.S. two-year interest-rate swap spread touched 32 basis points yesterday, the most since the beginning of the month. The measure rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds.

Investors demanded 2.85 percentage points of extra yield to buy 30-year bonds, which are among the securities that are the most sensitive to inflation, instead of two-year notes. The spread has averaged 2.67 points during the past five years.

The U.S. will sell $35 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven-year securities on three consecutive days next week starting Feb. 21.

--Editors: Dave Liedtka, Greg Storey

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

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


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