Treasuries rose for the first time in five days amid speculation failure of European leaders meeting in Brussels to provide clarity on aid for Spain will prolong the region’s debt crisis, stoking refuge demand.
The yield on the 10-year note dropped from the highest level in a month as Spanish Prime Minister Mariano Rajoy said his nation doesn’t feel any pressure to ask for a bailout and German Chancellor Angela Merkel questioned whether the goal of creating a euro-area bank supervisor by the end of 2012 was realistic. A U.S. industry report is forecast to show sales of existing homes fell in September, highlighting an uneven rebound in the U.S. housing market.
“It’s a long road of uncertainty and it’s been going on for so long,” Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of the 21 primary dealers that trade with the Federal Reserve, said of the European turmoil. “The market is finding its bottom and it’s becoming a range trade again; 1.82 percent has pretty good support. There’s no change in terms of the big picture.”
The benchmark 10-year yield declined two basis points, or 0.02 percentage point, to 1.81 percent at 9:27 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in August 2022 climbed 6/32, or $1.88 per $1,000 face amount, 98 10/32.
The yield rose to 1.83 percent yesterday, the highest level in a month. The rate rose through its 200-day moving average on Oct. 17, and it has held above the key level since then, based on closing prices.
Treasuries rebounded from the least expensive in almost two months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.77 percent today, after closing at negative .76 percent yesterday, the least costly level since Aug. 21. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.
A measure of stress in U.S. credit markets, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, rebounded from a record low level on an intraday basis reached earlier this week.
The U.S. two-year interest-rate swap spread, the difference between the two-year swap rate and the comparable-maturity Treasury yield, widened to 10.5 basis points today after narrowing to 8 basis points on Oct. 17 in New York, according to data compiled by Bloomberg. That was the least on an intra-day basis since Bloomberg started keeping data in November 1988. It is down from a 2012 high of 49.25 basis points on Jan. 3.
U.S. government securities maturing in 10 years or more have handed investors a 5.3 percent loss in the past three months, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Existing home sales dropped 1.6 percent last month from August, according to the median forecast of 78 economists surveyed by Bloomberg News before the National Association of Realtors reports the figure at 10 a.m. in New York. They rose 7.8 percent in August. Housing starts climbed 15 percent in September from August to a four-year high, government data showed Oct. 17.
“The economic backdrop is still quite weak and we are yet to see a sustainable improvement in economic indicators,” said Brian Barry, a fixed-income analyst at Investec Plc in London. “It would be a surprise if Treasury yields keep rising as they have this week. You wouldn’t expect such a large increase in yields given the negatives on the horizon as Treasuries are still a safe-haven asset.”
The Fed will sell as much as $1.1 billion of Treasury Inflation Protected Securities today due from April 2014 to January 2016, according to the Fed Bank of New York’s website. The central bank is swapping short-term Treasuries in its holdings for longer-term securities to put downward pressure on borrowing costs, part of its efforts to spur the economy.
Bidders in a $7 billion sale of 30-year inflation-indexed securities yesterday accepted a record-low yield of 0.479 percent for securities that guard against the threat of rising consumer prices.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed today at 2.52 percentage points. The average over the past decade is 2.17 percentage points.
In Brussels, Merkel said it’s an open question whether European policy makers can meet the deadline they’d set hours earlier to establish a euro-area bank supervisor by year-end.
“There are complicated questions to clarify and we’ll see in December if we complete it or not,” Merkel told reporters after a two-day European Union summit wrapped up today. “For now, the political will is there.”
The European Central Bank is set become the currency zone’s main financial supervisor by Jan. 1, raising the prospect of direct aid to Spain’s banks during 2013, the 27 EU leaders agreed at the gathering. The system will phase in and could cover all 6,000 euro-area banks by Jan. 1, 2014.
Spain already has secured a 100 billion-euro ($130 billion) financial-sector lifeline and has so far not sought to asked for aid that would unlock ECB bond-buying.