Bloomberg News

U.S. 10-Year Notes Post First Monthly Loss Since March

June 30, 2012

Treasury 10-year notes fell for the first time since March as European leaders took steps to curb the euro bloc’s debt crisis, easing concern it was spreading and damping investor demand for the safest assets.

Yields on 10- and 30-year debt had reached record lows on the first day of June amid speculation turmoil in Europe was worsening and U.S. economic growth was faltering. Treasuries still gained for the quarter, returning 3.4 percent, according to a Bank of America Merrill Lynch index. U.S. payrolls added 90,000 jobs in June, a report next week is forecast to show.

“European policy makers have so far averted a blow-up and seem to be making progress, which has given a jolt to risk assets at the expense of Treasuries,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “Still, we need to see some follow-though, as there is too much uncertainty for Treasuries to sell off dramatically.”

The 10-year note yield rose nine basis points, or 0.09 percentage point, to 1.65 percent yesterday in New York, from 1.56 percent on May 31, according to Bloomberg Bond Trader prices. The yield, which touched a record low 1.44 percent on June 1, declined three basis points this week.

The 30-year bond yield increased 11 basis points to 2.75 percent, widening the spread over two-year yields by about seven basis points to 245 basis points. The long-bond yields fell to a record low 2.51 percent on June 1.

Bond Returns

U.S. government securities’ gain from April through June was the biggest since the third quarter of 2011, when they returned 6.4 percent, according to Bank of America-Merrill Lynch’s Treasury Master index. Treasuries rose 2.1 percent for the year, the data showed. Global sovereign debt returned 2.2 percent for the second quarter and advanced 2.7 percent for 2012, another Merrill index showed.

A valuation measure showed 10-year notes were trading at a less expensive level. The term premium, a model created by economists at the Federal Reserve, was at negative 0.86 percent yesterday. That compared with negative 0.91 percent on May 31 and negative 0.94 percent, the costliest on record, on 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.

May ‘Cataclysm’

Ten-year yields dropped 36 basis points in May, the most in nine months, amid concern European turmoil was deepening. They reached the lowest ever June 1 as data showed U.S. payrolls added 69,000 jobs in May, less than half the 150,000 forecast by economists in a Bloomberg News survey. The benchmark yields have traded between 1.45 percent and 1.73 percent since then.

“There are fewer wild-card developments that we’ve seen in Treasuries, and that’s sort of Step One once you’ve gone through the cataclysm of May,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, said yesterday. “We’ve had some measure of stability, and Treasuries have gone into a range.”

The Labor Department will issue on July 6 its report on nonfarm payrolls in June. Estimates in a Bloomberg survey of 59 economists range between 35,000 and 165,000 more jobs.

Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ended June 26, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 55,639 contracts on the Chicago Board of Trade. Net-short positions rose by 32,642 contracts, or 142 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

European Summit

Treasuries dropped yesterday as European Union officials ended a two-day summit in Brussels, agreeing to relax terms on loans to Spanish banks and easing conditions of possible help for Italy. Bonds fluctuated earlier in the week as investors waited for the meeting amid speculation whether the region’s leaders would make progress on resolving their crisis.

EU officials also discussed ways to reduce the risk premiums on Italian and Spanish bonds, which have stoked concern that the euro bloc might break apart. They left open the timing and conditions of any support, raising the risk that bickering over the fine print will -- as after prior summits --nullify the initial boost to confidence.

‘More Optimistic’

“People had pretty low expectations of the summit and are a little bit more optimistic now,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, said yesterday. The firm is one of the Fed’s 21 primary dealers. “The devil is in the details on most of this stuff.”

The Treasury drew weaker-than-average demand this week at each of three note auctions totaling $99 billion.

Seven-year securities yielded a record low 1.075 percent in a sale on July 28. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.64, the lowest since October.

The bid-to-cover ratio at a $35 billion sale of five-year debt on June 27 that drew a yield of 0.752 percent was 2.61, versus an average of 2.97 at the past 10 offerings. An auction of the same amount of two-year securities the previous day had a ratio of 3.62, versus 3.95 at the May offering and an average 3.71 at the past 10. The sale drew a 0.313 percent yield.

Yield Levels

“What this does tell you is that people don’t like the levels,” said Jersey of Credit Suisse. “It’s hard to like these yields unless you think there’s going to be a significant deflationary impulse. It’s hard to imagine a significant rally if Europe continues to muddle through and the U.S. economy seems to be stabilizing at lower levels.”

The U.S. has sold $1.046 trillion in notes and bonds this year as President Barack Obama’s administration finances a fourth-straight deficit exceeding $1 trillion.

Pacific Investment Management Co.’s Bill Gross said a “debt trap” remains in place even after the European summit.

Pimco continues to avoid the debt of nations including Spain and Portugal in favor of U.S. Treasuries and mortgage securities, Gross, who runs the world’s biggest bond fund, said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

“The peripherals and even the core union nations have too much debt,” Gross said. “The marginal cost of that debt is far above nominal GDP growth in respective nations. That continues a debt trap unless the cost of debt can come down.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lindsey Rupp in New York at lrupp2@bloomberg.net

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


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