Bloomberg News

Treasuries Hold Gain on Concern Debt Crisis Is Deepening

April 17, 2012

Treasury 10-year yields stayed below 2 percent for a third day on speculation the European sovereign-debt crisis is intensifying.

U.S. government bonds have returned 1.3 percent this month, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 3.2 percent loss in the period including reinvested dividends, data compiled by Bloomberg show. Spanish 10-year yields climbed to a four- month high yesterday before the nation sells bonds this week. China’s government is taking steps to slow growth, Pacific Investment Management Co. said.

“The environment still remains supportive for Treasuries,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Ten- year yields below 2 percent reflect risk-aversion concerns stemming from the euro-region’s debt crisis and uncertainty surrounding the global economy.”

The yield on the benchmark 10-year note was little changed at 1.98 percent at 9:22 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 traded at 100 5/32. The yield dropped to 1.94 percent yesterday, the least since March 6. The 30-year yield was also little changed, at 3.13 percent.

Spain is scheduled to sell 12- and 18-month bills today, followed by auctions of debt due in 2014 and 2022 on April 19. The nation’s 10-year yield rose to 6.16 percent yesterday, the most since Dec. 1 and approaching the 7 percent level that pushed Greece, Ireland and Portugal to seek rescue packages.

Europe Concern

“There are some risks to the current economic situation: European sovereign debt and China,” said Kei Katayama, who buys non-Japanese bonds at Daiwa SB Investments Ltd., which oversees the equivalent of $61.6 billion from Tokyo, including Asia’s second-largest mutual fund. “Investors are relying on safer assets such as Treasuries.”

China will curb economic growth to address over-investment and bad loans that built up after policy makers used stimulus to combat the 2008 financial crisis, according to Pimco, which runs the world’s biggest mutual fund.

“Aside from some cuts in the reserve requirement ratio, we do not expect to see aggressively expansionary policy to combat the incremental economic slowdown that is unfolding right now in China,” Ramin Toloui, Singapore-based co-head of the global emerging markets portfolio management team, wrote in a report on the company’s website.

Largest Creditor

China was the largest foreign U.S. creditor in February amid a rebound in the country’s foreign-currency reserves as Japan’s purchases of Treasuries picked up.

China’s holdings rose for a second month, increasing by 1.1 percent to $1.18 trillion, U.S. Treasury data released yesterday show. Those of Japan, America’s second-largest lender, climbed 1.2 percent to $1.096 trillion. Net foreign purchases of Treasuries rose $41.2 billion, or 0.8 percent, to a record $5.1 trillion, the data show.

Ten-year Treasury yields less than 2 percent may be too low given the signs of a U.S. economic recovery, said Toyota Asset Management Co., a unit of the world’s biggest automaker by market value.

Home starts rose to a 705,000 annual rate in March following a 698,000 pace the prior month, according to a Bloomberg News survey before the Commerce Department data today. Existing-home sales increased 0.7 percent last month, a separate survey showed ahead of the April 19 report by the National Association of Realtors.

Industrial production gained 0.3 percent in March after being little changed in February, economists said before the Federal Reserve releases the figure today.

‘Recovering Modestly’

“The U.S. economy keeps recovering modestly,” said Masaru Hamasaki, who helps oversee the equivalent of $22 billion as chief strategist at Toyota Asset Management in Tokyo. “Yields at current levels are too low.”

The 10-year yield will increase to 2.57 percent by year- end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has widened to 2.26 percentage points from 1.95 percentage points at the end of last year. The average over the past decade is 2.14 percentage points.

Break-Even Rate

The five-year, five-year forward break-even rate, a measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.71 percent on April 12, below its 2.76 percent average during the past decade.

The U.S. plans to sell $16 billion of five-year TIPS on April 19. Merrill Lynch’s TIPS index has gained 2.5 percent this year, reflecting demand for inflation protection.

The Fed has pledged to keep its benchmark interest rate near zero until late 2014 to support growth. The U.S. central bank is also replacing $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs. It is scheduled to buy as much as $2 billion of Treasuries due from 2036 to 2042 today as part of the program, according to the New York Fed’s website.

The 30-year bond yield may fall toward a seven-week low should it break below its 100-day moving average at 3.11 percent, according to data compiled by Bloomberg. The rate dropped to 3.09 percent yesterday, the lowest since March 7. The yield may find support at its Feb. 28 low of 3.02 percent. Support refers to an area where buy orders may be clustered

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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


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