Bloomberg News

Treasury 5-Year Yields Fall to Record on Europe Crisis

July 20, 2012

Treasuries rose, with five-year yields falling to record lows, as Spain said its recession will extend into next year after getting approval for a bank bailout, pushing investors into the safety of government debt.

The yield on the U.S. 10-year note traded almost at a record low as the Spanish region of Valencia prepared to seek a rescue from the central government as European finance ministers approved a $122 billion bank rescue plan. Yields on Spain’s bonds earlier climbed to record highs over German bunds as Italian bond yields rose to a six-month high over comparable bunds.

“Everybody still views the U.S. Treasury market as the safe haven,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. Yields “could be driven even lower. It’s what’s going on in Europe again, it’s this fear.”

Five-year note yields fell three basis points, or 0.03 percentage point, to 0.57 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 0.5684 percent, below the previous mark of 0.577 percent set July 16.

The benchmark 10-year Treasury yield fell five basis points to 1.46 percent after touching 1.4449 percent. It set a record low of 1.4387 percent June 1. The 1.75 percent note due in May 2022 rose 15/32, or $4.69 per $1,000 face value, to 102 21/32.

The yield on the 30-year bond dropped seven basis points to 2.5 percent.

The two-year rate dropped to 0.2015 percent, the lowest level since Sept. 23.

Record Levels

Volatility dropped today to 61.3 basis points, almost the lowest since May 10, according to Bank of America Merrill Lynch’s MOVE index. It dropped to a five-year low of 56.7 basis points on May 7, and has averaged 75.6 basis points this year, touching a 2012 high of 95.4 basis points on June 15. It reached a record high of 264.6 basis points in October 2008 as the financial crisis intensified. The index measures price swings based on options.

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $150 billion after climbing yesterday to $247 billion, the most since July 11. Trading averaged $241 billion this year.

The term premium, a model created by the Federal Reserve that includes expectations for interest rates, growth and inflation, showed Treasuries are almost the most expensive ever. The gauge closed at a negative 0.9612 percent, close to the record negative 0.9617 set on July 10.

‘European Fears’

“It’s European fears, particularly the headlines coming out of Spain,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “While the aid package won approval, we hear now some of the regions are seeking help from the central government and that’s really where this new round of concern originated. That put a bid in Treasuries.”

Treasuries returned 2.5 percent in the three months ended yesterday, according to Bank of America Merrill Lynch Indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 2.1 percent loss in the same period, including reinvested dividends.

The yield spread between 10-year Spanish and German securities widened to 610 basis points. Credit-default swaps on Spain rose for a fifth day, climbing 19 basis points to 598 and approaching the record 624 basis points set June 18. The euro slid to the lowest level since 2000 versus the yen and a two- year low versus the dollar.

‘Safety Flows’

The euro dropped as much as 1.2 percent to 95.35 yen, the lowest level since November 2000. The shared currency fell as much as 1.1 percent to $1.2144, the weakest since June 2010.

“It appears to be the ongoing debt-resolution problem,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “That’s encouraged safety flows into the U.S. as Treasury notes remain among the cheapest of safe-haven assets. That’s encouraged the strong bid we see in the most distant part of the Treasury yield curve.”

The extra yield investors get for buying 10-year Treasuries instead of similar-maturity bunds widened seven basis points this week to 29 basis points. The average over the past year is 14 basis points.

Spain’s 10-year benchmark bond yields yesterday climbed above the 7 percent threshold for the first time since Prime Minister Mariano Rajoy unveiled his fourth austerity package last week. That’s the level that prompted bailouts for Greece, Ireland and Portugal.

Buying, Selling

Treasuries declined yesterday on speculation the Fed will take steps to counter the growth slowdown.

The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of quantitative easing, seeking to cap borrowing costs and stimulate the economy. While policy makers refrained from introducing a third round of purchases at a meeting last month, Bernanke indicated in two days of testimony in Washington this week that it’s an option. The Federal Open Market Committee next meets on July 31 and Aug. 1.

The U.S. sold $7.93 billion of Treasuries due from November 2014 to April 2015 today as part of a program known as Operation Twist, in which the Fed is swapping short-term Treasuries in its holdings for longer maturities to put downward pressure on long- term borrowing costs.

The U.S. will sell $35 billion of two-year notes, the same amount of five-year securities and $29 billion of seven-year debt over three days starting July 24, the Treasury announced yesterday.

“The expectations are that next week’s auctions will go well despite the absolute low level of yields,” said United Nations Federal Credit Union’s Sullivan.

To contact the reporters on this story: Susanne Walker in New York at

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

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