World Crisis Online

Treasuries gained, pushing 2- and 10-year yields down the most in 11 months, as U.S. inflation cooled, speculation rose that Europe’s debt crisis is worsening and stocks and commodities dropped on a loss of risk appetite.

U.S. notes rose for the first week in a month as President Barack Obama pledged to cut the deficit by $4 trillion within 12 years. Ireland’s debt rating was lowered by Moody’s Investors Service, spurring demand for safety. The U.S. sold $66 billion in notes and bonds, and the Federal Reserve will buy as much as $11.5 billion of Treasuries next week in a plan to spur growth.

“Inflation fears have been put to rest for the time being, and the market was able to digest the supply relatively well, which eased the market’s fear,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Now that concerns about Europe are back, it has helped depress yields further.”

Yields on 10-year notes dropped 17 basis points, or 0.17 percentage point, to 3.41 percent in New York, from 3.58 percent on April 8, according to Bloomberg Bond Trader prices. It was the biggest drop since May 21, 2010. The price of the 3.625 percent security due in February 2021 climbed 1 13/32, or $14.06 per $1,000 face amount, to 101 25/32.

Two-year note yields fell 11 basis points, the most since May 7, 2010, to 0.69 percent. Thirty-year bond yields slid 17 basis points, the biggest drop since Feb. 25, to 4.47 percent.

Stocks, Commodities

The Standard & Poor’s 500 Index dropped 0.6 percent, while the Thomson Reuters/Jefferies CRB Index of raw materials retreated 1.6 percent in its first five-day loss since March 18. Crude oil for May delivery also fell for the first week in a month, declining 2.8 percent to $109.66 a barrel in New York.

A gauge of inflation expectations that the Fed uses to help determine monetary policy, the five-year, five-year forward break-even rate, was at 3.1 percentage points, compared with 3.28 percentage points on Dec. 15, a 10-month high. The average for the past five years is 2.78 percentage points.

The benchmark 10-year note’s real yield, its yield minus the year-over-year core consumer price index, was 2.27 percent, compared with a 10-year median of 2.19 percent.

Moody’s downgraded Ireland’s foreign- and local-currency bond ratings yesterday by two levels to Baa3 from Baa1. Nouriel Roubini, the economist who predicted the global financial crisis, said a restructuring of Greece’s debt burden is just a matter of time and Spain may soon follow. He spoke at a conference in Almaty, Kazakhstan’s financial center.

Policy Differences

U.S. policy makers aired differences over how to tackle inflation before a report yesterday showed U.S. consumer prices, excluding food and fuel, rose less than forecast in March.

Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser indicated they’re more concerned about prices, with Lacker saying the central bank must tighten credit before inflation gains speed. Fed Governor Daniel Tarullo said he sees no sign of inflation spreading more broadly.

Core consumer prices rose 0.1 percent last month, less than the 0.2 percent forecast, data from the Labor Department showed in Washington. The broader consumer-price index increased 0.5 percent for a second month, in line with the median prediction of economists surveyed by Bloomberg News.

U.S. producer prices also trailed forecasts last month, Labor Department data showed on April 14. They increased 0.7 percent, compared with a 1 percent gain estimated in a Bloomberg News survey and a rise of 1.6 percent in February. Initial claims for jobless benefits rose last week more than predicted.

‘Accommodative Policies’

“Some of the more hawkish Fed inflationary commentary will not lead to any more meaningful debate at the Fed and is giving more credibility to those advocating accommodative policies,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The Fed has kept its benchmark rate at zero to 0.25 percent since December 2008 to support the economy and is purchasing $600 billion of Treasuries through June to spur growth.

The Fed bought $26.9 billion in Treasuries this week in its program. It scheduled buys for next week on April 18, 19 and 20.

The government auctioned $66 billion in 3-, 10- and 30-year debt this week. It will sell $14 billion in 5-year Treasury Inflation Protected Securities on April 21.

Nomura Holdings Inc. ended a neutral call on Treasuries and said it’s “time to start buying bonds again” as the end of the Fed’s debt-buying program looms amid volatile overseas markets.

Back to Treasuries

“Stocks and commodities have benefited more from the Fed’s easy-money policy,” George Goncalves, head of interest-rate strategy at Nomura, one of 20 primary dealers that trade Treasuries with the Fed, wrote April 14 in a client note. “As liquidity slows into June 30, we expect asset allocation back to U.S. Treasuries as investors take profits on risk assets.”

Foreign holdings of U.S. government securities increased for the 22nd consecutive month in February, gaining 0.5 percent to $4.47 trillion, according to the Treasury Department. Bill holdings declined for fourth straight month to $432.4 billion, the least since November 2008.

President Obama’s long-term plan for closing the budget shortfall through a combination of spending cuts and tax increases may be a “positive” for the nation’s credit quality and mark a reversal in the budget debate, according to Moody’s Investors Service.

“It seems both sides of this debate are now targeting lower debt and lower deficits,” said Steven Hess, senior credit officer, based on Obama’s speech on April 13. “We do see this as a turning point in terms of the debate. We would view that as a positive, but we’ll have to wait to see the outcome.”