Bloomberg News

U.S. 10-Year Yields Trade Close to Record Lows on Europe

May 29, 2012

Treasury yields traded close to record lows as concern about Spain’s ability to recapitalize troubled banks increased demand for the safest government assets.

U.S. 10-year note yields were little changed after Spain said it may need to sell bonds to rescue Bankia group, adding to concern the European debt crisis is worsening. A report showed confidence among U.S. consumers unexpectedly fell in May to the lowest level in four months.

“None of the news in Europe now is positive,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York one of 21 primary dealers that trade with the Federal Reserve. “Consumer confidence plummeted and that’s not helping. People are not thinking that bonds are cheap. They are being forced in.”

The benchmark 10-year yield rose one basis point, or 0.01 percentage point, to 1.75 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 lost 2/32, or 63 cents per $1,000 face amount, to 100 1/32. The yield reached as low as 1.71 percent, approaching the record 1.6714 percent set on Sept. 23.

Treasury trading was shut in the U.S. yesterday for Memorial Day.

Debt Returns

Treasuries have returned 2.6 percent since the end of March, according to Bank of America Merrill Lynch indexes. Investors tracking the MSCI All-Country World Index of stocks lost 9 percent. U.S. debt has returned 1.2 percent this year, the data show.

The 10-year yield touched a 2012 low of 1.69 percent on May 17 after reaching a high of 2.4 percent on March 20. It will increase to 2.44 percent by year-end, according to the median forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

Valuation measures show Treasuries are close to the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.8 percent, close to the most expensive closing level ever of negative 0.83 percent reached May 17. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Spanish 10-year bond yields climbed as high as 6.53 percent today, the most since November, on concern the nation’s banks will need additional financial support to weather the debt crisis. The nation’s favored option is to raise funds for refinancing Bankia in debt markets, said a spokesman for the Economy Ministry, who asked not to be identified by name in line with policy. Spain is trying to shore up its banks and help cash-strapped regions at a time of surging borrowing costs.

Spain’s Finances

Bank of Spain’s governor, Miguel Angel Fernandez Ordonez, will leave his role one month early before his term ends, the Bank of Spain said in an e-mailed statement.

The euro weakened to $1.25, the lowest level versus the dollar in almost two years.

“There’s a renewal of European crisis concerns,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Flight to quality remains a key bullish underpinning as the market digests headlines overseas.”

Risks from debt-strapped countries on the region’s economy have increased, boosting demand for Treasuries. Greece, responsible for 0.4 percent of the world economy, now poses a threat to international prosperity as investors raise bets its days using the euro are numbered.

Greek Numbers

Citigroup Inc. economists, who earlier forecast departure chances at as much as 75 percent, now are assuming as a “base case” that Greece will leave on Jan. 1, 2013. Bank of America Merrill Lynch strategists estimated the euro-region’s gross domestic product would contract at least 4 percent in the recession that follows, similar to the decline after Lehman’s 2008 collapse.

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.

While Treasury 10-year note yields approach record lows, they’re cheap compared with AAA debt of other nations, helping trigger record demand at U.S. bond auctions even in a fourth year of $1 trillion budget deficits.

Relative Yields

Yields on the benchmark security are 24 basis points higher than the average for comparable debt of nations from Germany to Australia, above the average of 12 basis points in the past year, data compiled by Bloomberg show. The gap between U.S. notes and German bunds widened to 37 basis points. As recently as November, bunds yielded 34 basis points more than Treasuries.

“Looking at the spectrum of opportunities in safe-haven assets, yields in 10-year Treasuries don’t really look that bad,” Gregory Whiteley, who manages investments in government debt at Los Angeles-based DoubleLine Capital LP, which has $35 billion in assets, said in a May 25 telephone interview.

The central bank sold $8.6 billion of Treasuries due from July 2014 to May 2015 today, according to the Fed Bank of New York’s website. The sales are part of its program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to support the economy by keeping down borrowing costs.

Consumer Mood

Confidence among U.S. consumers unexpectedly fell in May to the lowest level in four months as Americans grew more pessimistic about the labor market. The Conference Board’s confidence index decreased to 64.9 from a revised 68.7 in the prior month, figures from the New York-based private research group showed today. The median forecast of economists surveyed by Bloomberg News called for a reading of 69.6.

“It’s a general reminder that the economy has turned to the soft side here and people will start to take a look at expectations for nonfarm payrolls,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp.

The U.S. added 150,000 jobs in May, after a gain of 115,000 in April, based on a Bloomberg News survey of 80 economists before the Labor Department issues the nonfarm payroll figures on June 1.

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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