Bloomberg News

Treasuries Head for Longest Stretch of Gains Since 1998

May 11, 2012

Treasuries rose in the longest streak of weekly gains in more than 13 years, as Greece failed to form a unity government, increasing concern Europe’s debt crisis is worsening.

Ten-year yields dropped for an eighth week, close to a three-month low, as a $2 billion trading loss at JPMorgan Chase & Co. (JPM:US) boosted demand for safe assets. Thirty-year bonds gained as wholesale inflation declined last month and the Federal Reserve bought $1.8 billion of longer-term securities.

“The appetite for U.S. Treasury paper is immense,” said Paul Montaquila, head of fixed-income trading in San Ramon, California, at Bank of The West, a unit of BNP Paribas SA. “Europe is a dysfunctional family. Every time rates get to specific levels, the buying is incredibly strong.”

The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 1.84 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 gained 1/4, or $2.50 per $1,000 face amount, to 99 6/32.

The yield slid from 1.88 percent last week. It dropped to 1.79 percent on May 9, the lowest since Jan. 31.

Rally Time

The last time Treasuries rallied for so long was a nine- week advance that ended in October 1998, driven by demand for safety after Russia said in August of that year it would allow its currency to depreciate and delay some debt payments.

Valuation measures show Treasuries are near the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.77 percent, approaching the most expensive closing level ever of 0.79 percent reached on Feb. 2. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Average estimates for 10-year Treasury yields three months from now are at 1.99 percent, 24 basis points lower than expectations in April, according to a survey from Citigroup Inc., published yesterday.

Respondents to the survey, which was completed between May 7 and yesterday, put the likelihood of a large discrete negative shock coming out of Europe during the next three months at about 33 percent, with almost 67 percent stating the likelihood at greater than 20 percent.

Europe Watch

“It’s the ongoing dislocations in Europe,” said Chris Ahrens, head interest-rate strategist in Stamford, Connecticut, at UBS AG, one of 21 primary dealers that are obligated to bid in U.S. debt auctions. “There’s a ramping up in anxiety and that has rebounded to the benefit of Treasuries.”

Treasuries have gained 0.7 percent during the past month, according to Bank of America Merrill Lynch indexes. Demand for the securities has been boosted as Europe’s deepening debt crisis threatens to slow growth around the world.

Greek Pasok party leader Evangelos Venizelos failed to form a unity government after talks with political party leaders and will hand back the three-day mandate to President Karolos Papoulias tomorrow, Venizelos told reporters in Athens today, in comments televised live on state-run NET.

The failure to form a government adds to speculation the nation will abandon the euro as its currency amid a worsening recession.

JPMorgan Result

Thirty-year Treasury yields dropped three basis points to 3.01 percent.

JPMorgan Chief Executive Officer Jamie Dimon said late yesterday the company suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.

“Everybody was kind of blindsided by the trading losses and that’s helping Treasuries,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

The difference between the 10-year swap rate and the yield on similar-maturity U.S. debt was unchanged from the previous day at 14 basis points. It widened May 9 to as much as 18 basis points, the most since December. Swap rates are usually higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

Price Pattern

Wholesale prices in the U.S. fell in April for the first time in four months, led by a decline in fuel costs that signals inflation may cool. The 1.9 percent increase over the past 12 months was the smallest since October 2009.

The producer price index dropped 0.2 percent after no change in March, Labor Department figures showed today in Washington. Economists projected the gauge would be unchanged in April, according to the median estimate in a Bloomberg News survey.

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 2.6 percent, below its 2012 high of 2.8 percent and less than its five-year average of 2.79 percent.

The difference between the yields on the 10-year note and 10-year TIPS, known as the break-even rate, dropped to as low as 2.13 percentage points, the least since Feb. 2. The rate has averaged 2.15 percentage points for the past 10 years.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for May rose to 77.8 from 76.4 the prior month. The gauge was projected to drop to 76, according to the median forecast of 68 economists surveyed by Bloomberg News.

The Fed purchased Treasuries due from February 2036 to August 2041 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.

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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  • JPM
    (JPMorgan Chase & Co)
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