U.S. Two-Year Notes Rise for 10th Week, Longest Gain in 25 Years

June 18, 2011, 12:28 AM EDT By Susanne Walker and Daniel Kruger

June 18 (Bloomberg) -- Treasuries advanced, with two-year notes rising for a 10th straight week in their longest rally in a quarter-century, on concern Greece will struggle to avoid the euro area’s first sovereign-debt default.

Yields on notes of all maturities touched their 2011 lows this week as Greece’s Prime Minister George Papandreou pleaded with his allies in parliament to support his austerity plans. U.S. reports unexpectedly showed manufacturing in the Philadelphia and New York regions contracted before next week’s meeting of the Federal Open Market Committee.

“There is a lot of embedded fear in the marketplace,” said William Larkin, a fixed-income money manager in Salem, Massachusetts, at Cabot Money Management, which oversees $500 million. “People think the solution for Greece is going to be in years, if not decades.”

Yields on two-year notes decreased two basis points, or 0.02 percentage point, to 0.38 percent, according to Bloomberg Bond Trader prices. The 0.5 percent security due in May 2013 advanced 1/32, or 31 cents per $1,000 face amount, to 100 1/4.

The two-year note yields fell on June 16 to 0.33 percent, the lowest level since Nov. 5. The record low of 0.3118 percent was set the day before that. The last time two-year note yields dropped for 10 straight weeks was in February to April 1986.

Treasury Volatility

Volatility of U.S. debt is the highest in two months, according to Bank of America Merrill Lynch’s Move index. The gauge, measuring price swings based on over-the-counter options maturing in two to 30 years, rose to 87.90 on June 16, the most since April 8.

“I don’t know how it’s going to play out, and neither does the market,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “That’s why we’re volatile, jumpy.”

Yields on 10-year notes slid three basis points to 2.94 percent this week after touching 2.88 percent on June 16, the lowest level since Dec. 1. They dropped 17 basis points in the two days ended June 16, the most since the period ended March 16. The yields increased 11 basis points on June 14 in the biggest advance since Jan. 5.

Bonds fluctuated yesterday as Germany’s Chancellor Angela Merkel signaled a willingness to compromise with the European Central Bank to avoid a default by Greece and a report showed U.S. leading indicators rose more than forecast.

Merkel’s Stance

Merkel told reporters in Berlin at a press conference with French President Nicolas Sarkozy that “we would like to have a participation of private creditors on a voluntary basis,” regarding aid for Greece.

Her comments indicated reconciliation between Germany’s insistence that investors help bail out Greece with ECB warnings backed by France that any compulsory move risked a default.

Attention now shifts to Athens, where Papandreou overhauled the Cabinet to secure passage of austerity measures needed for a European Union and International Monetary Fund bailout.

Italy’s credit ratings may be reduced by Moody’s Investors Service because of economic growth challenges, risks associated with efforts to reduce debt and the potential for higher borrowing costs.

The nation’s Aa2 local and foreign currency government bond ratings were placed under review for a possible downgrade, Moody’s said in a statement yesterday.

Treasuries have rallied this quarter, pushing 10-year note yields down 50 basis points, on economic reports showing a slowdown in global growth as well as concern Europe is struggling to contain its debt crisis.

Regional Manufacturing

U.S. figures showed regional manufacturing shrank this month. The Philadelphia Fed’s general economic index dropped to negative 7.7, from 3.9 a month earlier. The New York Fed’s Empire State Index fell to minus 7.8 from 11.9. Economists forecast readings greater than zero, indicating expansion.

Investors have reduced bets on an increase in the Fed’s target rate for overnight lending. Futures indicating the likelihood of higher borrowing costs by March 2012 dropped to 22 percent yesterday from 32 percent a month ago. The fed funds target has been held at zero to 0.25 percent since December 2008. Policy makers meet June 21-22.

The Fed purchased $19.308 billion of Treasuries this week as part of its $600 billion second round of quantitative easing. The program to support the economy expires this month.

Bond fell briefly yesterday as the Conference Board’s leading indicators advanced 0.8 percent in May after a 0.4 percent drop in the previous month. The median forecast of 51 economists in a Bloomberg News survey was for a 0.3 percent increase in the gauge of the U.S. outlook for the next three to six months.

“The leading indicators seem to be one of the first positive economic data that we’ve had in a while,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “The market has priced in uncertainty in Europe and poor economic data in the U.S.”

--Editors: Dennis Fitzgerald, Greg Storey

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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