Yields fall as Europe, China worries fuel safety bid
photo A security guard stands in front of a panel displaying world market indexes at an exhibition hall of the Hong Kong Stock Exchange August 10, 2011. — Reuters picNEW YORK, May 15 — US Treasury prices rose on Monday, pushing yields down to their lowest levels since early October, as political turmoil in Greece, an anti-austerity vote in Germany and concern of slower growth in China drove a bid for safety.
Uncertainty over the impact of a potential Greek exit from the euro spurred the rush to safety, hurting riskier assets and helping US government debt.
Germany's political landscape appeared to be shifting as Chancellor Angela Merkel's conservative party was roundly defeated in an election in the country's most populous state. It was the latest vote in Europe to show austerity policies under attack.
The weekend decision by China, the world's second-largest economy, to loosen monetary policy, essentially a pro-growth move, underscored fears the global economy would worsen.
Commodity prices fell as markets anticipated weaker demand. US crude fell more than US$1.81 (RM5.57) to US$94.33 a barrel.
Spain sold 2.9 billion euros (US$3.8 billion) of short term debt, but its borrowing costs rose to just under 3 per cent, meaning it now pays twice as much for 12 month money as Germany pays for 10 years. The cost of insuring Spanish bonds against default hit an all-time high.
German bunds also benefited from safe-haven demand, June futures up 67 ticks to 143.42. On Wall Street, major stock indexes were down about 0.6 to 0.7 per cent.
"The same danger signs that have been flashing for more than six months are flashing red again right now so people are piling into Treasuries even at yields where it's hard to see value except that they look better than the alternatives," said Michael Cloherty, head of US rates strategy at RBC Capital Markets.
Benchmark 10-year notes rose 20/32, their yields falling to 1.78 per cent, down from 1.85 per cent late on Friday and 1.99 per cent in mid-April. As of late Friday, US yields had fallen for eight consecutive weeks.
Fresh worries about Spain's banking system also emerged after recent government moves failed to soothe investors.
"Treasuries are higher as fears about new political realities in Germany and Greece, global growth, and Spanish banks drive investors into safe-haven debt markets," said William O'Donnell, managing director and head of US Treasury strategy at RBS Securities in Stamford, Connecticut.
"Ten-year Treasuries broke key resistance of 1.80 per cent this morning," O'Donnell said. He said the next resistance level was 1.767 per cent.
The outlook for Greece's membership of the euro zone has become more uncertain since an election on May 6 left parliament divided between supporters and opponents of a 130 billion euro (US$168.3 billion) EU/IMF bailout.
If Greek political leaders cannot agree on a coalition, a fresh election is likely next month. Opinion polls show the vote would favor anti-austerity, left-wing parties which do not plan to adhere to Greece's bailout conditions.
Any outcome that threatens the bailout deal makes a default on its debt and an exit from the euro more likely, potentially hurting holders of Greek sovereign debt, including the IMF, the European Union (EU) and the European Central Bank (ECB).
Thirty-year bonds rose 17/32, their yields moving below 3 per cent to 2.93 per cent compared with a high yield of 3.09 per cent in a bond auction on Thursday and 3.01 per cent late on Friday.
Though Treasury yields are at their lowest since October, Cloherty said Tuesday's report on April US consumer prices could push yields even lower.
"We do think tomorrow's CPI report matters because we think the headline print will be negative," he said.
Economists polled by Reuters expect the headline CPI to be flat and up 0.2 per cent with food and energy items excluded.
"That only matters because the constraint to more QE3 right now is that the CPI headline number is well above the Fed's 2 per cent target," he said, referring to a third round of so-called quantitative easing.
"If we get a negative print on the CPI tomorrow and another soft number in May, then when the Fed meets in June, the headline CPI would be at or below the Fed's target which would remove one significant restraint on the Fed's taking further action," he said. — Reuters
