Bloomberg News

Treasuries Drop as Spanish Bailout Call Saps Safey Demand

June 11, 2012

Treasury 30-year bonds gained for the first time in six days on speculation a bailout of Spanish banks will provide only a short-term solution to the European sovereign-debt crisis.

U.S. government securities erased earlier losses as Spanish and Italian bonds slid on bets the 100 billion euros ($125 billion) of aid for Spain’s banks won’t be enough to stop turmoil from spreading. Treasuries had dropped earlier as stocks advanced, luring investors to higher-yielding assets. The U.S. will auction $66 billion of notes this week, starting with $32 billion of three-year securities tomorrow.

“It reflects the ongoing negative sentiment of the markets,” said Sean Simko, who manages $8 billion at SEI Investments Co. (SEIC:US) in Oaks, Pennsylvania. “Spain is still the tip of the iceberg. Once you move past Greece and Spain you still have Portugal and Italy.”

Yields on the 3 percent bond due in May 2042 fell four basis points to 2.71 percent, according to Bloomberg Bond Trader prices. The yield earlier rose as much as 11 basis points to 2.85 percent. The price rose 25/32, or $7.81 per $1,000 face value, to 105 30/32.

The benchmark 10-year yield fell five basis points to 1.59 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The yield earlier rose as much as nine basis points to 1.73 percent, the highest since May 30.

‘Isn’t Over’

Spain requested the funds during a regional conference call on June 9, becoming the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago. Prime Minister Mariano Rajoy characterized the deal as a credit line for banks and an endorsement of his policies.

Spain’s 10-year bond yield advanced 29 basis points to 6.51 percent after declining as much as 20 basis points.

“All eyes now are on Greece and Italy, so the European crisis isn’t over,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed.

Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. Italy’s Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.

‘Full of Danger’

U.S. government securities have gained 3 percent this quarter through June 8, based on Bank of America Merrill Lynch data, as concern Greece will exit the euro and increasing unemployment in the U.S. prompted investors to seek the safety of U.S. debt.

“The world’s full of danger,” said Chris Ahrens, an interest-rate strategist in Stamford, Connecticut, at UBS AG, one of the 21 primary dealers that trade with the Fed. “We’re just another aid package down the road in this whole process of trying to sort of the sovereign and financial issues.”

The average yield on bonds issued by the Group of Seven nations has fallen to 1.12 percent from 3 percent in 2007, Bank of America Merrill Lynch index data show. Germany’s two-year note yield fell below zero for the first time on June 1, while Switzerland’s has been negative since April 24, meaning investors are paying for the right to lend the nation money.

‘Synchronized Slowdown’

“We may be in a synchronized slowdown” in global economic growth, Mohamed El-Erian, who as chief executive officer of Pacific Investment Management Co. oversees $1.77 trillion, said in a June 6 telephone interview. “We could stay here for a while.”

The three-year Treasuries being sold tomorrow yielded 0.37 percent in pre-auction trading, compared with 0.36 percent at the previous offering on May 8. Investors bid for 3.65 times the amount for sale last month, more than the average of 3.38 for the previous 10 auctions.

The U.S. will sell $21 billion of 10-year notes on June 13 and $13 billion of 30-year bonds the following day.

Two regional Fed bank presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, have said the central bank should be prepared to take action if the economy deteriorates further. Williams and Lockhart are scheduled to speak today.

Fed Chairman Ben S. Bernanke said last week 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.

Operation Twist

“Fed speakers today could add another dimension to how U.S. rates move along with the latest development in the euro crisis,” Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, wrote in a note to clients.

The U.S. central bank sold $1.08 billion of Treasury Inflation Protected Securities maturing from January 2014 to January 2015 today under its program to replace holdings of shorter-term securities with longer-term bonds. The Fed bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur economic growth through lower borrowing costs.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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