Bloomberg News

Treasury 10-Year Yields Fall Most in Week on Euro Concern

June 25, 2012

Treasury 10-year yields fell the most in more than a week as investors sought refuge amid speculation European leaders will fail to make progress on stemming the euro bloc’s debt crisis at a two-day summit.

U.S. government securities gained, extending a quarterly advance, as German Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the crisis, setting Germany on a collision course with its allies before the meeting. The U.S. will auction $99 billion of notes this week, beginning tomorrow.

“There have been so many promises, so many meetings and so little produced on the European front,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “In this environment, you buy any dips in prices and play the range.”

The 10-year note yield slid seven basis points, or 0.07 percentage point, to 1.60 percent at 5:36 p.m. New York time, according to Bloomberg Bond Trader prices. It was the biggest intraday drop since June 15. The 1.75 percent security maturing in May 2022 advanced 21/32, or $6.56 per $1,000 face amount, to 101 11/32.

Yields on the 30-year bond dropped nine basis points to 2.68 percent.

Trading volume shrank. About $164 billion of Treasuries changed hands as of 5:33 p.m. through ICAP Plc, the world’s largest interdealer broker, the lowest since May 25 and down 9 percent from June 22’s $181 billion. Volume touched $396 billion on May 31. The average over the past year is $254 billion.

Volatility Drops

Volatility declined for a sixth straight day, the longest stretch since March, according to Bank of America Merrill Lynch’s MOVE index. It fell to 72.8 basis points, the lowest level since May 29. The index measures price swings based on options. It dropped 20 basis points last week, the most since June 2009.

Ten-year yields have fallen 61 basis points this quarter and have decreased 27 basis points in 2012. Treasuries returned 1.6 percent this year as of June 22, after gaining 9.8 percent in 2011, according to the Bank of America Merrill Lynch Treasury Master Index.

A valuation measure showed the benchmark notes trading at almost the most expensive level ever. The term premium, a model created by economists at the Federal Reserve, was at negative 0.87 percent, after reaching a record negative 0.94 percent June 1 as investors sought refuge from Europe’s debt turmoil.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.

European Summit

Stocks dropped, with the Standard & Poor’s 500 Index losing 1.6 percent and the MSCI World Index falling 1.4 percent.

Treasuries climbed before European leaders open their summit June 28 in Brussels. Germany’s Merkel said in a speech in Berlin the goal is a political union with stronger oversight. Proposals for joint euro-area bonds or bills and joint deposit insurance are “wrong and counterproductive,” she said.

Merkel’s comments kill off any hopes her fellow leaders in France, Italy and Spain may have had of a quick fix to bring down borrowing costs across the 17-nation euro region.

“It’s the risk-off trade again,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 the primary dealers that trade with the Fed. “We go back and forth with concerns out of Europe. People want to be optimistic, but there’s just so much uncertainty.”

Cyprus Plea

Cyprus became the fifth euro nation to seek a financial lifeline from the bloc’s bailout funds, after Greece, Ireland, Portugal and Spain. The third-smallest economy in the currency union cited spillover from Greece. The request will be limited to support for Cypriot banks, which need less than 6 billion euros ($7.5 billion), according to a person familiar with the bailout. Fitch Ratings Co. downgraded Cyprus to BB+, below investment grade.

Spain asked on June 9 for a bailout of as much as 100 billion euros to prop up its banks. Moody’s downgraded 28 Spanish banks today by one to four levels after cutting the nation’s government bond ratings on June 13 to Baa3 from A3.

The billionaire investor George Soros said yesterday Europe should start a fund to purchase the bonds of Italy and Spain in return for budget cuts in the nations. European leaders are running out of time to show investors they will do what’s necessary to save their currency, he said in an interview in London with Bloomberg Television’s Francine Lacqua.

‘Fiasco’ Possible

“There is a disagreement on the fiscal side,” Soros said. “Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco.”

The Treasury will auction $35 billion of two-year notes tomorrow, the same amount of five-year securities the next day and $29 billion of seven-year debt on June 28.

The Fed sold $8.37 billion of Treasuries today due from March to October 2014 as part of its Operation Twist program to cap borrowing costs, according to the Fed Bank of New York.

Central-bank officials led by Chairman Ben S. Bernanke last week extended the program, which is selling $400 billion of shorter maturities and replacing them with longer-term debt through the end of this month, until year-end. They increased it by $267 billion.

The difference between yields on 10- and 30-year Treasuries narrowed to 107 basis points, from 109 on June 22. The spread has decreased from this year’s closing high of 120 basis points in May, known as a flattening of the yield curve.

Treasuries remained higher even after sales of new homes in the U.S. increased in May more than forecast, rising 7.6 percent to a 369,000 annual rate. A Bloomberg News survey projected a rate of 347,000.

To contact the reporter on this story: Cordell Eddings in New York at

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

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