Treasury yields tumble to records as Europe spurs refuge demand

May 30 (Bloomberg) -- Treasury 10-year note yields fell to a record low as investors sought refuge from the deteriorating credit conditions of European sovereign borrowers.

The benchmark yield reached 1.6170 percent, less than its previous all-time low of 1.6714 percent on Sept. 23, as Spain struggled to recapitalize its banks and Italian bonds fell as the country sold less than its target at a debt auction. The Federal Reserve announced Sept. 21 that it would buy $400 billion of longer-term Treasuries, funding the purchases with sales of shorter-term notes, in an effort to bolster the U.S. economy and spur jobs growth.

“The continued rally is evidence by flight to quality that is being exacerbated by the lack of other safe assets,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Fed. “The lack of progress in Europe is causing increased angst in the Treasury market."

Benchmark 10-year note yields fell 11 basis points to 1.63 percent at 1:54 a.m. New York time after touching the lowest in Fed figures beginning in 1953. The 1.75 percent note due May 2022 added 1 1/32, or $10.31 per $1,000 face amount, to 101 3/32, according to Bloomberg Bond Trader prices. The yield drop is the biggest on the benchmark note since April.

Lower Yields

Thirty-year bond yields 13 basis points, the most since December, to 2.72, the least since October. Five- and seven-year note yields reached set all-time lows.

Benchmark government bond markets around the world are setting records on haven demand while yielding less than Treasuries, boosting the appeal of the U.S. securities.

Yields on the 10-year note are 22 basis points higher than the average for top-rate sovereign debt of nations from Germany to Australia, above the average of 12 basis points in the past year, data compiled by Bloomberg show. German two-year debt yields fell as low as zero today, compared with 0.27 for U.S. two-year notes.

“People want to invest in the safe haven assets,” said Peter Fisher, head of fixed income at BlackRock Inc., on Bloomberg Television’s “InsideTrack” with Erik Schatzker, Sara Eisen, Stephanie Ruhle and Scarlet Fu. “You don’t buy Treasuries or bunds, either one, as a return play.”

Previous Levels

U.S. 10-year yields are down from 5.3 percent in June 2007, before the financial crisis intensified, and below the average of 4.96 percent during the past 20 years. Treasuries have returned 2.6 percent since the end of March, according to Bank of America Merrill Lynch indexes, after returning 9.8 percent last year, including reinvested interest, the most since 2008.

The 10-year yield may decline to 1.5 percent, said FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields in 2011. Low was the only one among 70 analysts in a Bloomberg News survey who predicted the yield would fall to 2 percent by the end of last year.

“Today’s move is huge and it’s driven almost entirely by fear,” Low said. “The pace of events in Europe has accelerated and it’s accelerating at the same time European leaders seem to be reaching an impasse on solutions.”

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, or TIPS, which represents traders’ expectations for the rate of inflation over the life of the bonds, fell to 2.06 percentage points, the lowest since May 17. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20.

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