Treasuries gained, pushing 10-year note yields to the lowest level since December, as Europe’s debt crisis worsened and the Federal Reserve squelched speculation it would provide more stimulus while the economic recovery slowed.
Rates on one- and three-month bills turned negative as investors sought a refuge in the world’s safest securities. The Treasury attracted higher-than average-demand at this week’s three note and bond auctions even after Moody’s Investors Service and Standard & Poor’s said the US may lose its top credit ratings as deficit reduction talks stall. Republican lawmakers plan a vote on raising the debt limit next week.
“We’re seeing risk aversion,” said Dan Mulholland, a trader in New York at Royal Bank of Canada, one of the 20- primary dealers that bid on Treasury auctions. “There’s still a lot of uncertainty surrounding Greece and Italy and how those situations will pan out.”
The 10-year note yield fell 12 basis points, or 0.12 percentage point, this week to 2.91 per cent. The yield dropped as low as 2.81 per cent on July 12, the least since December 1. The price of the 3.125 per cent security due in May 2021 rose 1 1/32, or $10.31 per $1,000 face amount, to 101 27/32.
Rates on one- and three-month bills closed the week at 0.005 per cent as investors were willing to forgo returns in order to preserve their principal.
Crisis Intensifies
Treasuries rose for a second consecutive week as Moody’s lowered Ireland’s credit rating to junk, fuelling concern that the European sovereign-debt crisis will spread beyond the three nations that already receive bailouts and damp investors’ appetite for higher-risk assets. Greece was downgraded to CCC by Fitch Ratings, the lowest grade for any country, and three steps above default.
The 10-year borrowing costs for Italy and Spain surged this week to the highest since the introduction of the euro in 1999. Italian notes rose as high as 6.02 per cent and Spanish bonds climbed to 6.31 per cent. The cost of insuring Irish and Portuguese government bonds also hit records this week, implying a 60 per cent chance of default.
