Treasuries up on Greece, US may sell notes at record low yield

May 9 (Bloomberg) -- Treasury 10-year note yields fell below 1.8% for the first time since February as Greek politicians struggled to form a government, adding to concern that Europe’s financial turmoil is deepening and boosting demand for the safest securities.

Ten- and 30-year yields dropped to the lowest levels in three months before the U.S. sells $24 billion of the benchmark notes, on track for a record low yield. Bill Gross at Pacific Investment Management Co. and Jan Hatzius at Goldman Sachs Group Inc. said investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing economy.

“The fear that is out there due to the situation in Europe is pretty strong,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We don’t know the end situation in Greece. Because of the fears, the auction will go well. There are a lot of people out there who are nervous and are looking to own Treasuries here, even at 1.8%.”

The 10-year yield fell three basis points, or 0.03 percentage point, to 1.81% at 10:09 a.m. New York time, according to Bloomberg Bond Trader prices. The 2% note maturing in February 2022 rose 9/32, or $2.81 per $1,000 face amount, to 101 22/32. The yield touched 1.79%, the lowest level since Jan. 31.

Thirty-year bond yields declined two basis points to 3.01%, reaching the lowest since Feb. 2.

Greek Stalemate

A stand-off between Greek politicians since inconclusive elections on May 6 has reignited concern the nation will be unable to meet the terms of the two bailouts it has negotiated since May 2010. With parliament split, the country at the center of the debt crisis is again facing the risk of leaving the euro.

Spanish 10-year bond yields rose above 6% today for the first time since April 27, and Italy’s securities declined as the turmoil infected the region’s larger nations.

German 10-year bund yields dropped below 1.50% for the first time since Bloomberg began collecting the data in 1989. The yield slid as much as four basis points to 1.498%.

The two-year swap spread, an indicator of risk in the financial system, rose two basis points to 33.83 basis points, the widest spread since January.

Game Changer

“The last two days give the appearance of being more of a fundamental move to recognize the tangible reality of systemic risk -- not just fear or uncertainty things might deteriorate,” Jim Vogel, head of agency-debt research at FTN in Memphis, Tennessee, wrote in a client note.

Valuation measures show Treasuries are near the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.78%, close to the most expensive level ever of 0.79% reached on Feb. 2. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

A Fed decision to buy more bonds is “getting closer,” Pimco’s Gross, who runs the world’s largest mutual fund in Newport Beach, California, wrote on Twitter yesterday.

The U.S. central bank bought $2.3 trillion of bonds in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy. A Labor Department report May 4 showed U.S. employers added 115,000 jobs in April, the least in six months.

‘Sensible Choice’

The U.S. economy is “dreary,” Goldman’s Hatzius wrote in a report yesterday.

“In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for U.S. monetary policy makers,” New York-based Hatzius wrote.

The Fed is replacing $400 billion of short-term Treasuries in its holdings with longer-term debt to keep borrowing costs down. The central bank plans to buy as much as $1.5 billion of Treasury Inflation Protected Securities today as part of the plan, targeting securities due from July 2018 to February 2042, according to the Fed Bank of New York’s website.

The 10-year notes on sale today yielded 1.84% in pre-auction trading, compared with 2.043% the previous time the government sold the securities on April 11. The record low of 1.90% was set in January’s sale.

“The never-ending euro-zone crisis and the global duration grab that it has triggered has pushed U.S. 10-year yields to levels” that may lead to a record-low rate at the auction, George Goncalves, a strategist at Nomura Securities International Inc. in New York, wrote in a report yesterday.

Bid Detail

Demand increased at an auction of three-year debt yesterday. Investors bid for 3.65 times the number of securities on offer at yesterday’s auction. The notes drew a yield of 0.362%, compared with a forecast of 0.365% in a Bloomberg News survey before the sale.

The U.S. is scheduled to auction $16 billion of 30-year bonds tomorrow. The sales will raise $35.3 billion of new cash as maturing securities held by the public total $36.7 billion, according to the U.S. Treasury.

Treasuries have returned 0.6% this year, including reinvested interest, Bank of America Merrill Lynch indexes show. They gained 9.8% in 2011 as the European financial turmoil deepened.

Bloomberg News

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