Treasuries surged, pushing yields on five-, seven- and 10-year notes to historic lows, as investors sought a refuge on concern US growth is slowing and Europe’s sovereign-debt crisis is getting worse.
Yields on 30-year bonds dropped this week the most since 2008 after the Federal Reserve said earlier in August it would keep borrowing costs unchanged until at least mid-2013 and Standard & Poor’s lowered the top US credit rating. The rally in bonds indicates Fed Chairman Ben S Bernanke may signal at a conference on August 26 in Jackson Hole, Wyoming, that additional measures to lift the economy are needed.
“Clearly growth continues to be extremely weak,” said Larry Milstein, managing director of government and agency debt trading in New York at R W Pressprich & Co, a fixed-income broker and dealer for institutional investors. “There’s still concern for what’s going on in Europe. Despite the downgrade by S&P, investors are looking for safety, and that’s clearly in the Treasury market.”
Yields on 30-year bonds dropped this week 34 basis points, or 0.34 per centage point, to 3.39 per cent, according to Bloomberg Bond Trader prices. The 3.75 per cent securities due in August 2041 increased 6 9/32, or $62.81 per $1,000 face amount, to 106 23/32.
Benchmark 10-year note yields fell below 2 per cent for the first time, tumbling on August 18 to a record low 1.9735 per cent. Five- and seven-year note yields touched all-time lows of 0.79 per cent and 1.31 per cent. Two-year note yields were little changed at 0.19 per cent.
US DEBT RETURNS
Treasuries have returned 2.3 per cent since S&P lowered the U.S. credit rating on August 5, and are up 3.4 per cent this month. It’s the biggest gain since government securities increased 3.5 per cent at the depths of the financial crisis in December 2008, according to Bank of America Merrill Lynch’s US Treasury Master Index.
“It’s capitulation that growth will be subpar,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the U.S. central bank. “In 2008, there was optimism that we would have growth by now.”
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US stocks tumbled this week, with the Standard & Poor’s 500 Index dropping 4.7 per cent in a fourth straight weekly slump. Gold rose to a record above $1,880 an ounce. The dollar dropped to post-World War II low against the yen.
PHILADELPHIA MANUFACTURING
Yields on 10-year notes tumbled for a fourth week as reports showed manufacturing in the Philadelphia region unexpectedly contracted in August by the most in more than two years and consumer prices excluding food and energy rose last month at the slowest pace since April.
The US economy climbed at a 1.3 per cent annual rate last quarter following a 0.4 per cent gain in the first three months of the year that was less than earlier estimated, the Commerce Department reported last month.
Bank of America Merrill Lynch’s MOVE index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two- to 30 years, rose to 100.30 yesterday, up from 87.80 on August 17.
Fixed-income securities from the US to Europe and Asia have returned 1.9 per cent on average in August, the most since gaining 2.4 per cent in December 2008, according to Bank of America Merrill Lynch’s Global Broad Market Index.
BOND YIELDS
Yields as measured by the index, which covers more than 19,000 government, corporate, asset-backed and other types of securities, have fallen to 2.25 per cent, from this year’s high of 3.03 per cent in April.
The Treasury will sell $35 billion in two-year notes, the same amount of five-year debt and $29 billion of seven-year securities in auctions beginning August 23. The amounts are the same as last month’s offerings.
The European Commission said it may present draft legislation on euro bonds to help contain the debt crisis when completing a report on the feasibility of common debt sales. The commission, the EU’s regulatory arm in Brussels, earlier this year opposed such a step because of German-led objections.
“The report will, if appropriate, be accompanied by legislative proposals,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a written response to a European Parliament question.
Treasuries rallied earlier this week after Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy dismissed calls for the issuance of euro bonds that would allow borrowing on behalf of all 17 euro states.
EUROPEAN BANKS
US regulators are stepping up scrutiny of American operations of Europe’s largest banks on concern the euro region’s sovereign-debt crisis may lead to funding problems, the Wall Street Journal reported August 18. The New York Fed has been holding talks with the lenders and sought information about their access to funds, said the newspaper, citing people it didn’t identify.
New York Fed President William C Dudley said in response to audience questions after an address in Newark, New Jersey, that the central bank always keeps an eye on the performance of US and foreign banks, not monitoring one group more than the other.
Bernanke heads this week to Jackson Hole, where he indicated in August 2010 that the central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases may be warranted if growth slows. Two months later, the Fed announced a $600 billion second round of US debt purchases to support the recovery that ended in June.
‘AT WORST, MIXED’
Dudley said yesterday in remarks in Lyndhurst, New Jersey, that America’s economic performance is “at worst, mixed,” with negative news offset by loosening credit, firmer retail sales and stronger bank balance sheets.
The extra yield Treasury investors get to hold 30-year bonds instead of two-year notes fell this week to 320 basis points, the narrowest on a closing basis since September 2010.