Bloomberg News

Treasury 10-Year Yield Touches 12-Week Low as Refuge

April 27, 2012

Treasury 10-year note yields rose from a 12-week low as a report showing first-quarter growth increased tempered a rally triggered in Europe by concern that the region’s sovereign-debt crisis will worsen.

The term premium, a model created by economists at the Federal Reserve, show that Treasuries were at almost the most expensive levels in seven weeks. Pacific Investment Management Co.’s Mohamed El-Erian said the lower-than-forecast growth figures suggests additional monetary stimulus remains on option for the Fed even though there is no immediate need for action.

“People are not clamoring for the securities at these levels,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of 21 primary dealers that trade Treasuries with the Federal Reserve. “The bond market will need a new catalyst to propel yields a lot lower. They are low enough.”

Yields on benchmark 10-year notes fell one basis point, or 0.01 percentage point, to 1.93 percent at 5 p.m. New York time, after reaching 1.88 percent, the lowest since Feb. 3, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2022 rose 1/32, or 31 cents per $1,000 face value, to 100 18/32. Ten-year rates have fallen six basis points since touching 1.99 percent on April 20.

Two-year rates fell to as low as 0.25 percent today, a level unseen since Feb. 10, while the 30-year yield dropped to 3.06 percent, matching the lowest since Feb. 29.

“We’re seeing prices improve,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “You’re not seeing follow-through with momentum. It’s indicative of a market that’s getting tired.”

Term Premium

The term premium touched negative 0.66 percent. It reached negative 0.67 percent on April 23, the most expensive on a closing basis since March 6. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Ten-year notes completed a six-week advance, the longest series of gains since June, on concern Europe’s debt crisis was widening. U.S. bonds have returned 1.4 percent since March 31, according to a Bank of America Merrill Lynch gauge. The Standard & Poor’s 500 (SPX) Index of U.S. shares has handed investors a 3.4 percent loss over the same period, including reinvested dividends.

A rally in 10-year Treasuries next week would match the seven-consecutive-week rise ended in December 2008.

‘Below 2 Percent’

“As long as Europe continues to give us positive reasons to stay below 2 percent, then we’ll be below it,” said Steven Ricchiuto, chief economist in New York at primary dealer Mizuho Securities USA, Inc. “I don’t think there’s anything in the domestic data to upset that.”

The U.S. economy expanded at an annualized rate of 2.2 percent in the first quarter, from 3 percent in the previous three-month period, Commerce Department figures showed today in Washington. Economists surveyed by Bloomberg had forecast a rise of 2.5 percent.

“If we continue this weakening trend, the Fed will come back in and try to sustain this market and this economy,” El- Erian, the chief executive officer of the world’s largest manager of bond funds, said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “I don’t think there is an immediate need now.”

The Federal Reserve bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June to boost the economy.

The U.S. sold $8.63 billion in notes maturing from July 2014 to April 2015 as part of the central bank’s plan to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.

Volume, Volatility

Trading volume dropped to $195.5 billion, from $246.6 billion yesterday, according to ICAP Plc, the world’s largest interdealer broker. The average in 2012 is $249 billion. Volume reached $439 billion on March 14, the highest since August.

Volatility dropped yesterday to the lowest since June 2007. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, dropped to 65.2 basis points. It reached 93.3 basis points on March 20, the highest level this year. It has averaged 112.56 basis points for the past five years.

S&P lowered Spain’s long-term sovereign-credit rating yesterday by two levels to BBB+ from A, with a negative outlook. The nation’s budget trajectory is likely to worsen and the country may need to provide more fiscal support to banks, the ratings company said in a statement yesterday.

‘Negative Growth’

Spain, the fourth-biggest economy in the euro region, is scheduled to auction notes maturing in 2015 and 2017 on May 3. The nation’s 10-year bond yields climbed to 6.16 percent last week, the highest this year, and were at 5.90 percent today.

“If you already have negative growth in lots of the economies, and it’s a situation where they will go with austerity measures to reduce debt burdens, it’s more of a negative impact as those measures start to take hold,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp.

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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