Prices of Treasury securities rose Friday, pushing 10-year yields to nearly five-week lows, as resurgent financial stress in Europe spurred demand for the relative safety of U.S. debt.
Benchmark 10-year yields approached the biggest weekly decline in almost four months amid concern Banco Espirito Santo SA, Portugal’s second-biggest lender, would become embroiled in the financial woes of a parent company. Portuguese 10-year bonds rose after the biggest two-day rout in a year. The U.S. budget deficit this fiscal year was the smallest since 2008, a government report showed.
“Generation-low yields in Japan and across Europe are making the U.S. look like a high-yielding safe credit,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “With the European worries, you are seeing Treasuries benefit. The U.S. is cheap to a lot of comparable sovereign securities.”
The 10-year yield fell two basis points, or 0.02 percentage point, to 2.52 percent as of 3:01 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note due in May 2024 gained 5/32, or $1.56 per $1,000 face amount, to 99 26/32.
The yield has dropped 12 basis points this week, the most on a closing basis since the five days ended March 14, and fell to as low as 2.49 percent Thursday, the least since June 2. The move erases a 10-basis-point yield increase from last week.
Treasurys remain attractive versus other sovereigns. The extra yield that Treasury 10-year notes offer compared with their Group-of-Seven counterparts was 66 basis points. It touched 73 basis points on July 4, the most since April 2010.
The Bloomberg U.S. Treasury Bond Index returned 3.2 percent this year. The Bloomberg Global Developed Sovereign Bond Index gained 4.9 percent, reflecting trader expectations for Europe and Japan to keep borrowing costs at record lows.
“The peripherals had been a one-way trade until now,” said Shyam Rajan, an interest-rate strategist at Bank of America Corp. in New York, one of 22 primary dealers that trade with the Fed. “To the extent there’s been some news to trigger some position squaring, it’s translated into risk-off sentiment.”
The Portuguese bank sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt by a member of the banking group. Banco Espirito Santo said it had exposure of 1.18 billion euros ($1.6 billion) to companies of Grupo Espirito Santo and is waiting for the release of that group’s restructuring plan to assess any potential losses. Portugal’s central bank said the lender is protected.
Yields on Portugal’s 10-year government securities dropped 12 basis points to 3.86 percent, after increasing 37 basis points during the two previous days. The debt yielded 1.35 percentage points more than similar maturity Treasurys, down from as much as 15.55 percentage points in 2012.
With “disappointments from Europe, you’ve built into the current price structure that Europe’s not doing very well,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “We now need at least a couple of more weeks to make sure Europe’s not going to disappoint further. That will keep the long end of the Treasury curve in a lower range than it would be otherwise.”
Treasurys also climbed this week as minutes of the Federal Reserve June policy meeting eased concern the central bank would move up its plans for an interest-rate increase next year.
Traders see about a 37 percent chance the Fed will increase its key rate by June 2015, little changed from the end of May, federal funds futures contracts show. The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25 percent since December 2008.
The difference between the yields on five-year notes and 30-year bonds was at 1.71 percentage points. The figure is up from 1.64 percentage points on July 9, the narrowest since March 2009. During the period, it widened to as much as 3.11 percentage points in November 2010.
The budget deficit for the fiscal year narrowed as a stronger economy bolstered tax payments by consumers and businesses, a government report showed.
The $365.9 billion federal budget shortfall from October through June compared with a $509.8 billion gap in the same period a year earlier. Last month, the government posted a $70.5 billion surplus, compared with a $116.5 billion excess a year earlier, the report showed.
The Treasury’s $13 billion sale of 30-year bonds Thursday at a yield of 3.369 percent attracted the most demand in more than eight years from a class of investors that includes foreign central banks amid signs of financial stress in European markets and relatively attractive U.S. yields. Indirect bidders purchased 53.2 percent of the debt at the auction, the highest level since the February 2006 offering of the securities.
The U.S. sold $27 billion of three-year debt on Wednesday at a yield of 0.992 percent and auctioned $21 billion of 10-year debt Tuesday at a yield of 2.597 percent.
The sales will raise $5.1 billion of new cash, as maturing securities held by the public total $55.9 billion, according to the Treasury.
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