Bloomberg News

Treasuries Fall Third Day on Bets Central Banks Will Spur Growth

July 27, 2012

Treasuries fell for a third day on speculation major central banks from the Federal Reserve to the Bank of Japan will boost measures to revive the global economy.

Two-year notes headed for the first weekly loss since June as French President Francois Hollande and German Chancellor Angela Merkel were to speak today about how to help Spain. Officials will do everything possible to preserve the euro, European Central Bank President Mario Draghi said yesterday. A U.S. report today is forecast to show gross-domestic-product growth slowed in the second quarter.

“Some of the fear was driven out of the market by Draghi’s comments yesterday,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “This could be a temporary thing, and we are waiting for the GDP numbers. Yields are extremely low but at the same time the circumstances that have led to these levels remain.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.46 percent at 7:20 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 declined 7/32, or $2.19 per $1,000 face amount, to 102 19/32.

Two-year yields were little changed at 0.23 percent, having climbed three basis points since July 20, the first weekly increase since the period ended June 22.

Hollande told reporters he would speak to Merkel today about implementing last month’s summit agreements and on how to help Spain reduce its borrowing costs.

Draghi Comments

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said in a speech in London, yesterday, fueling speculation the central bank may resume its bond-purchase program. His comments sparked a rally in Spanish and Italian bonds.

Germany’s Bundesbank said restarting the ECB’s bond- purchase program was not the best way to address the sovereign debt crisis. A spokesman for the Frankfurt-based Bundesbank also said it opposes giving Europe’s rescue fund a banking license so that it can borrow from the ECB.

U.S. GDP growth slowed to an annual rate of 1.4 percent in the second quarter, from 1.9 percent in the previous three months, according to a Bloomberg News survey of economists before the Commerce Department reports the figure today.

Inflation Bets

Yields indicate investors are cutting bets on inflation as growth slows. The five-year, five-year forward break-even rate, a measure of expectations for prices that the Federal Reserve uses to guide monetary policy, fell to 2.39 percentage points on July 24, the least in four months and below the average of 2.75 for the past decade.

“Treasury bond yields will decline further,” said Hiromasa Nakamura, who invests in Treasuries in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion and is part of Japan’s third-biggest bank. “The economy is very fragile. Inflation is subdued.”

The U.S. central bank plans to sell as much as $8 billion of Treasuries due from May to September 2015 today, according to the Fed Bank of New York website. The sales are part of the central bank’s effort to swap short-term Treasuries in its holdings for those with longer maturities, supporting the economy by pushing long-term borrowing costs lower.

Treasury 10-year yields will probably stay between 1.40 percent and 1.50 percent for the remainder of 2012, Rabobank’s Marey said. The yield will climb to 1.90 percent by year-end, according to the median forecast in a Bloomberg News survey.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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