Bloomberg News

Treasuries Gain as Spanish Finances Add to Europe Concern

May 25, 2012

Treasuries rose amid concern the European debt crisis will worsen as Spain’s regional governments were reported to be struggling with finances, stoking demand for government debt.

U.S. 10-year yields remained lower after Standard & Poor’s reduced ratings on Spanish banks. Treasuries were poised for a second monthly gain as Spain’s Deputy Prime Minister Soraya Saenz de Santamaria said the country’s government is analyzing “with all caution” requests from regional governments to help them regain access to capital markets and Catalan President Artur Mas repeated his call for government help.

“The report about more government intervention in Spain caused the market to get firm,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “People are getting nervous about Europe.”

The U.S. 10-year yield fell four basis points, or 0.02 percentage point, to 1.74 percent at 2:01 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 added 11/32, or $3.44 per $1,000 face amount, to 100 3/32.

The yield climbed two basis points this week, the first increase since the period ended March 16.

Holiday Trade

Treasury trading closed at 2 p.m. New York time and will remain shut on May 28 in observance of Memorial Day in the U.S., according to the Securities Industry and Financial Markets Association in New York.

Treasuries returned 1 percent this month as of yesterday, Bank of America Merrill Lynch indexes show, reflecting demand for the relative safety of U.S. government securities. They climbed 1.5 percent in April.

More than $4 trillion was erased from the value of global equities in the first three weeks of the month as concern deepened Greece will abandon the euro.

“People are worried about headlines that may come out of Greece,” saidIra Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Federal Reserve. “There’s a flight-to- quality bid going on.”

Volatility was little changed yesterday at 73.1 basis points, according to Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options. The gauge is below the one-year average of 87.8 basis points.

Trading Data

Trading volume rose yesterday to $293 billion through ICAP Plc, the world’s largest interdealer broker. The figure is above the 2012 average of $242 billion. Volume reached $439 billion on March 14, the highest since August.

A $29 billion sale of seven-year U.S. notes yesterday drew a record-low yield of 1.203 percent in the final of three auctions this week totaled $99 billion.

The Treasury sold $35 billion of five-year debt May 23 at a record low yield of 0.748 percent, and the same amount of two- year securities on May 22 at 0.3 percent.

This week’s note offerings, combined with the May 17 auction of $13 billion in 10-year Treasury Inflation Protected Securities, raised $52.9 billion of new cash, as maturing securities held by the public total $59.1 billion.

Primary dealer holdings of U.S. government debt rose to $108 billion, the highest ever, as of May 16, from a net bet against the securities of $11.9 billion in September, according to the Fed.

Asset Holdings

Banks have added Treasuries to meet revised reserve rules from the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland.

The Fed is replacing $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to support the economy.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt, was 2.14 percentage points, close to the average of 2.15 percent during the past decade.

Investors demand 2.56 percentage points of extra yield to buy 30-year bonds instead of two-year notes. The spread narrowed to 2.48 percentage points on May 17, the least in seven months. Thirty-year bonds are more sensitive to inflation because of their longer maturity.

The 10-year yield touched a 2012 high of 2.4 percent on March 20 and a low of 1.69 percent on May 17. It will increase to 2.42 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.

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

May 25 (Bloomberg) -- David Rosenberg, chief economist and strategist at Gluskin Sheff Associates Inc., talks about the outlook for the global markets and investment strategy. He speaks with Erik Schatzker and Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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