Justin Lederer Comments: Euro Fears Drive Safety Bid, Driving Bond Prices Higher
January 12, 2012, Investor's Business Daily
U.S. Treasuries advanced on Wednesday as concerns about Italy and upcoming debt auctions in the euro zone rekindled worries about the region, whetting investor appetite for safe-haven government debt.
That demand let the U.S. Treasury auction $21 billion in reopened 10-year notes at a record low yield of 1.90%, beating the previous low yield of 2% in September.
"The Treasury market strength can be attributed to risk-averse sentiment on European concerns and talks of the collapse of the euro," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. "There is clearly demand for 10s and for Treasuries in general."
In afternoon trade, the benchmark 10-year Treasury note was up half a point, yielding 1.91%.
The euro fell 0.8% to $1.2672, closing in on a 16-month low of $1.2666 set on Monday, after Fitch's head of sovereign ratings said the European Central Bank needs to ramp up its buying of euro zone debt to support Italy and prevent a "cataclysmic" collapse of the currency.
In addition, investors are on edge ahead of sovereign debt auctions by Italy and Spain over the next two days, while senior euro zone bankers said talks about private sector participation in a Greek bailout are going badly.
The Federal Reserve's purchase of $2.25 billion in bonds due in 2036 to 2041 also supported Treasuries.
"The Federal Reserve is out there looking to buy," said Brian Jacobsen, chief fixed-income strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wis.
Jacobsen said some market participants could also be buying long-dated Treasuries, speculating that the Fed might start another round of quantitative easing, purchases the Fed has made to help keep interest rates low and foster economic growth.
In its periodic, anecdotal narrative of business conditions across the United States, the Fed said the economy continued to expand modestly through the end of 2011, but a weak job market was still preventing incomes from rising.
In its beige book report, the U.S. central bank said the outlook was one of steady if slow improvement.
Looking forward, Treasuries will assess data on new jobless claims — expected total 375,000 — and December retail sales, thought to have risen 0.3%. But perceptions about Europe's ability to avoid recession and stabilize its debt issues could dominate trade again.
"Anywhere near 2% on the 10-year yield is now considered a ceiling and part of that is due to the short-term risk of headlines coming out of Europe," said Rob Robis, head of fixed-income macro strategies at ING Investment Management in Atlanta. "That is making people cautious and that creates demand for U.S. Treasuries."
