Bloomberg News

Treasuries Gain on Bets Europe’s Crisis Harming Growth

June 08, 2012

Treasuries rose for a second day amid concern Spain may become the fourth of the 17 euro-bloc countries to require emergency assistance, stoking investor demand for safety.

U.S. 10-year yields dropped from the highest this month before European finance leaders hold a conference call this weekend to discuss a potential aid request to shore up Spain’s lenders. Treasuries were also supported after Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. has options for further monetary easing. The U.S. will sell $66 billion of notes and bonds next week.

“It is a different version of the same story every morning,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There are concerns about Europe, the stability of the banking system and what it means for the global economy. Supply hasn’t mattered since the crisis began, so there’s no reason to think that in the middle of next week supply will be a concern.”

Ten-year note yields dropped six basis points, or 0.06 percentage point, to 1.58 percent at 9:08 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 advanced 18/32, or $5.63 per $1,000 face amount, to 101 18/32. The yield climbed to 1.68 percent yesterday, the highest level since May 30.

An index of Treasuries maturing in more than a year returned 1.3 percent in the past month, the best performance among 26 sovereign-debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, after accounting for the dollar’s appreciation.

Expensive Level

A valuation measure showed Treasuries are at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.88 percent after closing on June 1 at negative 0.94 percent, the record. The average over the past year is negative 0.44. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Ten- and 30-year yields reached record lows of 1.4387 percent and 2.5089 percent on June 1. The yields touched 2012 highs in March, 3.49 percent for the long bond and 2.4 percent for the 10-year note.

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said yesterday in testimony to Congress’s Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed.”

The Federal Open Market Committee opens a two-day policy meeting on June 19.

Yield Gap

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, was 2.1 percentage points, down from this year’s high of 2.45 percentage points in March. The average over the past decade is 2.15 percentage points.

Reports showing German exports and Italian industrial production declined in April added to evidence Europe’s crisis is harming the global economy.

German exports, adjusted for work days and seasonal changes, slid 1.7 percent in April from a month earlier, when they gained 0.8 percent, the Federal Statistics Office said in Wiesbaden. Italian output fell 1.9 percent from March, when it rose a revised 0.6 percent, the national statistics office said in Rome. A separate report showed French confidence declined.

Spain Downgraded

Fitch Ratings downgraded Spain yesterday by three levels to BBB, taking the rating to two steps off non-investment grade. The cost to the state of shoring up banks may amount to as much as 100 billion euros ($124.6 billion), compared with its previous estimate of 30 billion euros, Fitch said.

Spain’s 10-year bond yield climbed as much as 18 basis points to 6.27 percent today, and the euro slid 0.9 percent to $1.2446. Prime Minister Mariano Rajoy said for the first time he’s discussing with European leaders how to help Spanish banks.

European finance ministers will discuss this weekend a possible aid package for Spain, according to a German official who declined to be identified because the matter is confidential.

The U.S. central bank plans to buy as much as $2.25 billion of Treasuries today due from February 2036 to May 2042, according to the Fed Bank of New York’s website. The purchases are part of its program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of this month to keep down borrowing costs.

Program Extension

U.S. policy makers will probably extend and modify the program, Ward McCarthy, chief financial economist at Jefferies & Co., told Pimm Fox yesterday on Bloomberg Television’s “Taking Stock.”

The central bank will probably buy $300 billion of mortgage-backed securities and $115 billion of 30-year bonds in the second version of the program, according to Jefferies, one of the 21 primary dealers that trade Treasuries with the Fed. U.S. central bankers next meet on June 19-20.

The U.S. will auction next week $32 billion of three-year notes, $21 billion of 10-year securities and $13 billion of 30- year bonds. The three sales start June 12.

Japanese investors cut their holdings of long-term Treasuries by 2.86 trillion yen ($36.1 billion) in April, the Ministry of Finance reported today, the most based on MOF data since 2005.

To contact the reporters on this story: Susanne Walker in New York at; Lukanyo Mnyanda in Edinburgh at

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

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