Tags: Treasury Yields Touch 5-Week Low on Europe Turmoil | U.S. Outlook

Treasury Yields Touch 5-Week Low on Europe Turmoil, U.S. Outlook

Monday, 04 March 2013 11:07 AM

Treasury 10-year yields touched a five-week low as Italy moved closer to a new election, boosting demand for the safest assets, after an anti-austerity vote last week left Europe’s third-largest economy in political deadlock.

The benchmark U.S. notes fluctuated before data this week forecast to show the jobless rate held at 7.9 percent for a second month and as officials signaled budget cuts that began taking effect March 1 would continue for weeks, possibly months. Federal Reserve Vice Chairman Janet Yellen said the central bank should continue its $85 billion a month of bond buying while tracking the costs from the program.

“People are focused on what’s going on in Washington and certainly in Italy,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed. “I’m surprised the euro crisis ever went away.”

Benchmark Treasury 10-year yields rose two basis point to 1.85 percent at 9:53 a.m. New York time, according to Bloomberg Bond Trader data, after falling earlier to 1.83 percent, the lowest level since Jan. 24. The yield declined 12 basis points, or 0.12 percentage point, last week, the most since the period ended Aug. 31. The price of the 2 percent note due February 2023 fell 5/32, or $1.56 per $1,000 face value, to 101 1/4.

Treasuries were at almost the most expensive level since January. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached minus 0.76 percent on March 1, the lowest level since Jan. 16. The rate was minus 0.74 percent today. Negative readings indicate investors are willing to accept yields below what’s considered fair value.

Fed Purchases

The U.S. central bank may buy as much as $10.75 billion of Treasuries in four purchase operations this week, according to a schedule posted on the New York Fed’s website. The acquisitions are part of its $85 billion in month buying of Treasury and mortgage debt to support the economy.

Yellen, the Fed’s No. 2 official, echoed in a speech in Washington today Chairman Ben S. Bernanke’s comment last week that the benefits of the central bank’s historically low interest rates and near-record $3.09 trillion balance sheet outweigh any risk of financial instability. The benchmark rate target has been zero to 0.25 percent since 2008.

China, Italy

Treasuries rose earlier after a survey showing China’s services industries slowed last month. Euro-area finance ministers meet in Brussels today to discuss issues including a bailout for Cyprus. In Rome, Stefano Fassina, a top aide to Democratic Party leader Pier Luigi Bersani, said Italy may need to hold another vote this year after passing new electoral laws.

“There are a number of uncertainties like the Italian elections, the issue of Cyprus and these things bring risks to the market,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “This is the context in which bonds normally do well. We are, in the short term, bullish on Treasuries because when you look at the 10-year yield there is still scope for it to fall.”

The 10-year yield may reach 1.80 percent in the next few weeks, Lammens said. It last fell to that level on Jan. 2, according to data compiled by Bloomberg.

Italian political instability, after last week’s election ended in a four-way split, threatens to reignite concern that Europe’s debt crisis will deepen. Voters handed the party of comedian-turned-politician Beppe Grillo, with its anti-spending cut message and a call for a referendum on euro membership, more than 25 percent of the vote.

Italy may hold new elections this year if Bersani and his Democratic Party fail to find enough backing in parliament to form a government, Fassina, the group’s economic policy spokesman, told Sky TG24 TV yesterday.

Chinese Economy

In China, the non-manufacturing Purchasing Managers’ Index fell to 54.5 in February from 56.2 in January, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement yesterday. The index’s reading has been above 50, which indicates expansion, for at least two years.

President Barack Obama’s aides and congressional leaders signaled the budget reductions will continue for weeks at least. Both sides indicated that revisiting the reductions would begin after they resolve a looming confrontation over legislation that’s needed to keep federal agencies running beyond March 27, placing a premium on avoiding a government shutdown.

The automatic U.S. spending cuts may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office. The cuts total $1.2 trillion over nine years, with $85 billion scheduled to take place in the remaining seven months of this fiscal year.

U.S. employers added 160,000 jobs in February, economists in a Bloomberg survey forecast before the Labor Department reports the data on March 8. Payrolls grew by 157,000 positions in January. The unemployment rate stayed at 7.9 percent, economists estimated.

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Treasury Yields Touch 5-Week Low on Europe Turmoil, U.S. Outlook
Treasury Yields Touch 5-Week Low on Europe Turmoil,U.S. Outlook
Monday, 04 March 2013 11:07 AM
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