Treasuries gain as weaker data add to Fed stimulus speculation

Greek Vote

Greece’s June 17 election will turn on whether voters in the nation, which is in a fifth year of recession, accept open- ended austerity to stay in the euro or reject the conditions of a bailout and risk the turmoil of becoming the first to exit the 17-member currency.

German yields have advanced from record lows reached this month as the euro-region’s deepening crisis fueled concern the currency bloc’s biggest economy will be left picking up a mounting tab.

“We’ve had some Treasury outperformance over bunds recently on worries that Germany might have to take on more liabilities,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “People want to stay on the sidelines until they know the outcome of this weekend’s elections.”

Coordinated Action

Central banks of major economies are preparing for coordinated action to provide liquidity if needed, Reuters reported yesterday, citing officials linked to the Group of 20 nations. G-20 policy makers are scheduled to meet on June 18-19.

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy. The central bank plans to buy as much as $1.5 billion of Treasury Inflation Protected Securities due from July 2018 to February 2042 today under its program known as Operation Twist, which aims to replace holdings of shorter-term securities with longer- term bonds, according to the Fed Bank of New York’s website.

The U.S. sold $66 billion in notes and bonds this week, with new auction records set on the 10-year yield and the 30- year bond. The bonds sold yesterday yielded a record low of 2.72 percent, versus 3.09 percent at an auction on May 10. The government sold $32 billion in three-year securities on June 12, and $21 billion of 10-year notes two days ago at a record-low yield of 1.622 percent.

CPI Fell

The U.S. consumer-price index declined 0.3 percent in May, the biggest drop since December 2008, after no change the prior month, the Labor Department reported yesterday.

The gap in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, was 2.11 percentage points, down from a 2012 high of 2.45 percentage points in March.

Treasuries have returned 3.1 percent this quarter through yesterday, Bank of America Merrill Lynch data showed. The MSCI All Country World Index of shares handed investors an 8.5 percent loss including reinvested dividends in the same period.

Bloomberg News

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