BLBG: Treasuries Advance on Deficits, Pushing Yields to Six-Week Lows
By Cordell Eddings and Susanne Walker
Feb. 6 (Bloomberg) -- Treasuries gained, driving 10-year yields down for a fifth straight week, as concern some European nations might default on their debt drove investors to the safety of U.S. securities.
Yields on notes dropped to the lowest levels in at least six weeks as sovereign risk crises in nations such as Greece, Portugal and Spain dulled investors’ appetite for higher- yielding assets. The U.S. economy unexpectedly lost 20,000 jobs last month, a report showed, and the Treasury prepared to sell a record-tying $81 billion in notes and bonds next week.
“Sovereign risk has taken center stage and the beat of the drum is starting to get louder and louder,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The safe-haven bid has come back into play, and investors are looking for safety.”
The yield on the two-year note dropped five basis points, or 0.05 percentage point, to 0.76 percent, from 0.81 percent on Jan. 29, according to BGCantor Market Data. It touched 0.72 percent, the lowest level since Dec. 9. The price of the 0.875 percent security maturing in January 2012 rose 3/32, or 94 cents per $1,000 face amount, to 100 7/32.
The 10-year note yield fell two basis points to 3.57 percent and touched 3.53 percent, the lowest since Dec. 21. The difference between 2- and 10-year yields was 2.80 percentage points. It touched a record high of 2.90 on Jan. 11.
U.S. 30-year bonds fell for the week, pushing yields up three basis points to 4.52 percent.
Most-Indebted Members
European Central Bank President Jean-Claude Trichet failed to allay investors’ concern that the euro region’s most-indebted members, Greece, Spain and Portugal, threaten the stability of the currency. European stocks tumbled yesterday, with the Dow Jones Stoxx 600 Index losing 2.2 percent, and the euro dropped to the weakest level in more than eight months against the dollar, $1.3586.
Credit-default swaps on the MarkitiTraxx Europe index rose yesterday to the highest level in four months in London.
The U.S. unemployment rate fell to 9.7 percent in January, the lowest level since August, from 10 percent, a Labor Department report showed yesterday. Payrolls dropped as companies boosted worker hours and overtime instead of taking on new hires. The median forecast of 85 economists in a Bloomberg News survey was for an increase of 15,000 jobs for January. The report revised the December job loss to 150,000, from 85,000.
‘A Ways Off’
“The economic numbers failed to alleviate the economic growth concerns, even though the unemployment rate fell,” wrote Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, in a note to clients. “In even the best of cases, a true job recovery appears to be a ways off.”
Growth in the U.S. will “slowly reduce” the unemployment rate, Kansas City Federal Reserve Bank President Thomas Hoenig said Feb. 4 in a speech in Oklahoma City. Interest rates “can’t stay zero forever,” he said. Hoenig was the lone dissenter from the central bank’s pledge Jan. 27 to keep interest rates at a record low for an “extended” period.
Futures contracts on the Chicago Board of Trade showed yesterday that traders saw a 13 percent chance the Fed will lift the target rate by June, compared with 48 percent odds a month ago. The rate is now a range of zero to 0.25 percent.
Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Fed Chairman Ben S. Bernanke and the Obama administration.
Note, Bond Sales
Taleb, a principal at Universal Investments LP in Santa Monica, California, said on Feb. 4 without being more specific that investors should bet on a rise in long-term Treasury yields as long as Bernanke and White House economic adviser Lawrence Summers are in office. Taleb spoke at a conference in Moscow.
The Treasury will sell a record-tying $81 billion of notes and bonds next week at its quarterly refunding auctions: $40 billion in 3-year securities, $25 billion of 10-year debt and $16 billion in 30-year bonds. The sales will be held over three days starting Feb. 9.
There’s no need for larger auctions to help finance the nation’s deficit, the U.S. said this week. The government “now believes that the current auction calendar provides debt managers with sufficient flexibility to address a range of expected borrowing needs,” said Matthew Rutherford, the Treasury Department’s deputy assistant secretary for federal finance, according to minutes of an advisory committee meeting.
The department also is considering more frequent sales of Treasury Inflation Protected Securities, or TIPS, to improve liquidity in this market. One possible addition is a second reopening of 10-year TIPS, which would start in July if implemented, the department said on Feb. 3.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
