Dec. 14 (Bloomberg) -- Treasuries rose, with the yield difference between two- and 10-year notes holding near the widest in six months, as continued concern over some European countries’ ratings outlooks drove demand for the safest assets.
Treasuries were little changed earlier after Dubai World said it would pay debt due today. Abu Dhabi provided $10 billion for Dubai’s financial support fund to help repay obligations. Greek Prime Minister George Papandreou may announce measures to cut the European Union’s biggest budget deficit today while European Central Bank council member Erkki Liikanen said Greece must take responsibility for its own public finances.
“There’s still a lot of skepticism surrounding Greece’s outlook,” said Stuart Thomson, an fixed-income fund manager at Ignis Asset Management in Glasglow. “That concern and lack of liquidity into the year-end are forcing some investors to reduce risk-taking activities in the near-term. U.S. government bonds are going to benefit from that.”
The yield on the benchmark 10-year Treasury dropped 3 basis points, or 0.03 percentage point, to 3.52 percent as of 6:24 a.m. in New York, according to BGCantor Market Data. The 3.375 percent security due in November 2019 rose 7/32, or $2.19 per $1,000 face amount, to 98 25/32.
The yield spread between two- and 10-year notes was at 2.73 percentage points, from 2.75 percentage points at the end of last week, the highest since June 4.
The Dow Jones Stoxx 600 Index of European shares rose as much as 1 percent before trading 0.6 percent higher.
Greek Speech
Papandreou will speak at 7 p.m. in Athens, according to an e-mailed statement from the prime minister’s press office late yesterday.
Greek bonds plunged last week after Fitch Ratings cut the nation’s credit rating one step to BBB+. Spain had the outlook on its AA+ debt rating lowered by Standard & Poor’s to “negative” from “stable” last week.
The difference in yield, or spread, investors demand to hold Greek bonds over German debt increased 8 basis points to 216 basis points today. The spread between 10-year Treasuries and Greek bonds widened 5 basis points to 179 basis points.
Abu Dhabi’s decision to aid Dubai helped limit further gains for U.S. bonds, according to David Keeble, the head of fixed-income strategy in London at Calyon, the investment banking arm of Credit Agricole SA.
‘Blood on the Floor’
“There would have been blood on the floor without the bailout,” Keeble said.
Concern that Greece and Dubai wouldn’t be able to meet their commitments hasn’t helped Treasuries turn around what Bank of America’s Merrill Lynch indexes show is a 2.5 percent decline this year. Government securities tumbled as the U.S. economy climbed back from its steepest recession since the 1930s and investors sought higher-yielding assets. U.S. corporate bonds rallied 26 percent.
U.S. industrial production rose for a fifth month in November, based on the median forecast in a Bloomberg News survey of economists before the Federal Reserve reports the figure tomorrow. A Labor Department report tomorrow will show producer prices increased, a separate Bloomberg survey shows.
International buying of U.S. financial assets quickened in October, economists said before the Treasury Department reports the figure tomorrow. Net purchases of long-term notes, bonds and stocks rose to $42.3 billion from $40.7 billion in September, another Bloomberg survey showed.
Futures Traders
Futures traders are reducing bets for gains in two-year Treasuries as Fed officials meet this week amid signs the economic recovery is lifting the labor market from its worst slump since before World War II.
Hedge-fund managers and other large speculators cut so- called net-long positions in two-year note futures by 4.2 percent, the most in five weeks. The contracts dropped to 204,891 in the period ended Dec. 8 from the record high of 221,816 on Nov. 10, according to data compiled by the U.S. Commodity Futures Trading Commission in Washington.
All 91 economists in a survey by Bloomberg News said the Fed will keep its target interest rate for overnight loans between banks near zero at this week’s meeting.
A survey of investors by Ried, Thunberg & Co. shows fund managers became more bearish on Treasuries.
The company’s index measuring investor sentiment toward government debt through the end of June fell to 40 for the seven days ended Dec. 11 from 41 the previous week. Readings below 50 show investors expect prices to fall. The economic analysis company in Jersey City, New Jersey, surveyed 25 fund managers controlling $1.41 trillion.
Japanese Bonds
Nowhere are yields as low as in Japan’s debt market and nowhere are returns higher as Prime Minister Yukio Hatoyama’s government fails to stop deflation.
The combination of the fastest drop in consumer prices in five decades and the yen trading near a 14-year high has turned Japanese government bonds into the past month’s best performers among the 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. The debt returned 3.6 percent in dollar terms and 5.6 percent in euros. So-called JGBs rose 0.83 percent this year in local currency.
Deflation, or a persistent decline in consumer prices, is sparking demand even as Hatoyama boosts borrowing to a record 53.5 trillion yen ($605 billion) in the year ending March 2010 to pay for fiscal stimulus. Japanese 10-year notes yield 1.295 percent, lower than in the U.S., U.K. and Germany, for so-called real yields of 3.80 percent after accounting for deflation. The comparable rate in the U.S. is 3.74 percent.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
