Bloomberg News

Treasuries End Nine-Week Rally as Europe Seeks Compromise

May 26, 2012

Treasuries dropped, halting the longest rally since 1998, as European leaders sought a compromise to resolve the region’s debt crisis, crimping demand for U.S. government debt.

The yield on the 10-year note rose from almost record levels as German Chancellor Angela Merkel left the door open to a compromise on debt sharing as Italian Prime Minister Mario Monti said he can help bring the bloc’s biggest economy around to acting in Europe’s “common good.” Two Treasury note auctions drew record low yields before a Labor Department report June 1 forecast to show May nonfarm payroll growth exceeded the previous month.

“The issues going on in Europe are clearly the main driver of the market,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “Unless nonfarm payrolls come in extremely high, or low, away from expectations, all eyes will be looking at the European Union and how they want to proceed.”

The U.S. 10-year yield rose two basis points for the week, or 0.02 percentage point, to 1.74 percent, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 1/8, or $1.25 per $1,000 face amount, to 100 3/32.

The yield increased ended nine weeks of declines and marked the first gain since the period ended March 16. It has dropped 17 basis points this month, as of yesterday.

Holiday Trade

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

The yield dropped yesterday, approaching its record 1.67 percent reached Sept. 23, as Standard & Poor’s reduced ratings on Spanish banks and amid concern Greece may exit the euro. It reached a 2012 low of 1.69 percent on May 17 after touching a high of 2.4 percent on March 20.

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. The euro touched a 22-month low yesterday, while the Standard & Poor’s 500 Index fell as much as 8.7 percent from an almost four-year high.

Hedge-fund managers and other large speculators increased their net-long position in bond futures in the week ending May 22, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 48,844 contracts on the Chicago Board of Trade, the most since December 2007, the Washington- based commission said in its Commitments of Traders report.

Debt Returns

Treasuries returned 1 percent this month as of May 24, Bank of America Merrill Lynch indexes show. They climbed 1.5 percent in April.

The U.S. sold $99 billion in Treasuries this week. A $29 billion sale of seven-year U.S. notes May 24 drew a record-low yield of 1.203 percent. The Treasury sold $35 billion of five- year debt the previous day at a record low yield of 0.748 percent, and the same amount of two-year securities on May 22 at 0.3 percent.

“There are a lot of bad things happening and people are looking for a place to hide,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. “This stuff is just so unpredictable.”

Cash Raise

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.

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. While Merkel refused to back joint euro-area bonds at a Brussels summit on May 23, Germany’s opposition parties wrung a concession from the chancellor on her return to Berlin May 24 to reconsider a separate proposal on common liability for sovereign debt.

Spain’s Deputy Prime Minister Soraya Saenz de Santamaria yesterday said the country’s government is analyzing “with all caution” requests from regional governments to help them regain access to capital markets.

Trading Numbers

Volatility was little changed May 24 at 71.2 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 volume closed at $142 billion yesterday after the market shut early, down from $294 billion the previous day 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.

“There’s a flight-to-quality bid going on,” 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. “People are worried about headlines that may come out of Greece.”

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.

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.

U.S. payrolls rose by 150,000 in May, according to the median forecast of 70 economists in a Bloomberg News survey before the Labor Department releases figures next week.

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 yesterday, close to the average of 2.15 percent during the past decade.

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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