Treasuries fell for the week as bets that Spain may win financial assistance damped demand for refuge and the U.S. prepared to sell $66 billion in notes and bonds.
U.S. bonds erased earlier gains today on speculation their surge from record lows couldn’t be sustained. European officials prepared for a conference call this weekend to discuss a potential aid request to shore up Spain’s lenders. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. has options for further monetary easing, even as he added that further steps could have “diminishing returns.”
“There is a belief that there will be some sort of bailout for Spain, and that Europe will start to get itself together, and it is taking the bid out of the Treasury market,” said Sean Murphy, a trader in New York at Societe Generale SA, one of the 21 primary dealers that trade with the Fed. “But obviously the fear concerns are not over, and that should put a lid on how high yields can go.”
The 10-year note yield was little changed today at 1.64 percent at 5:04 p.m. New York time, according to Bloomberg Bond Trader prices. Earlier it fell eight basis points, the most since June 1. The 1.75 percent security maturing in May 2022 advanced 1/32, or 31 cents per $1,000 face amount, to 101 1/32.
The benchmark note’s yield increased 18 basis points this week, the most since March. It advanced to 1.68 percent yesterday, the highest level since May 30. Thirty-year bond yields were little changed today at 2.75 percent, after dropping earlier as much as nine basis points. They climbed 23 basis points for the week.
Ten- and 30-year yields reached record lows of 1.4387 percent and 2.5089 percent on June 1. They touched 2012 highs in March, 3.49 percent for the long bond and 2.4 percent for the 10-year note.
Treasuries have returned 3 percent this quarter, compared with a 2 percent gain by sovereign debt of all Group of Seven nations, according to Bank of America Merrill Lynch indexes.
The U.S.’s AA+ credit rating was affirmed today by Standard & Poor’s. The ratings company kept the outlook negative, citing political and fiscal risks it said may lead to another downgrade by 2014.
S&P stripped the U.S. of its top AAA ranking on Aug. 5, criticizing the nation’s political process and saying that spending cuts agreed on by lawmakers wouldn’t be enough to reduce record deficits.
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 0.83 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.
While the 10-year note has surged amid the European debt crisis and concern U.S. economic growth is faltering, its yield is only about 10 basis points rich to fair value given the negative performance of other markets, including equities and commodities, according to Credit Suisse Group AG, a primary dealer.
“The outlook and corresponding behavior within other markets has been so dramatic that even while rates have rallied, they have in some senses moved from rich to closer to the fair- value yield,” analysts at the firm, including Eric Van Nostrand in New York, wrote in a report June 7. “Looking at prior richening trends, there appears to still be scope for Treasury yields to make a move lower should the Fed decide to ease further.”
U.S. 10-year note yields will drop to match those on Japanese government bonds, 0.8 percent, according to the investor at Mizuho Asset Management Co. who predicted the rally in Treasuries that began in 2010.
Prospects for deflation and additional monetary easing by central banks will push the U.S. yield to its Japanese peer’s level at year-end, said Akira Takei, head of the international fixed-income department for Mizuho Asset, a unit of Japan’s third-biggest listed bank. He spoke in an interview.
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.
Bernanke said yesterday the European debt crisis “poses significant risks to the U.S. financial system and economy and must be monitored closely.” Speaking to Congress’s Joint Economic Committee in Washington, he refrained from discussing steps the Fed might take to protect U.S. growth.
The Federal Open Market Committee opens a two-day policy meeting on June 19.
Yields indicate investors expect inflation to hold in check in the U.S., providing Bernanke room for further stimulus.
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 2.14 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.
Increases in U.S. consumer prices, excluding food and energy, slowed to 2.2 percent last month from a year earlier after rising 2.3 percent in April, a Bloomberg News survey forecast that a Labor Department report will show on June 14.
Reports showing German exports and Italian industrial production declined in April added to evidence Europe’s crisis is harming the global economy.
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. 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. Three of the 17 nations in the euro block, Greece, Ireland and Portugal, have received international bailouts.
“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.”
The U.S. central bank bought $1.9 billion of Treasuries today due from February 2036 to November 2041. The purchases were 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.
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