Treasuries rise, snap three-day drop, as debt swap talks continue

Treasuries rose, snapping three days of declines, as investors sought safer assets on speculation Greece and its bondholders are struggling to agree on terms of a debt-swap deal.

Yields on benchmark 10-year notes dropped after Charles Dallara, who’s representing private creditors, said bondholders negotiating a debt swap with Greece have made their “maximum” offer, leaving it to the European Union and International Monetary Fund to decide whether to accept the deal.

Two-year yields fell one basis point before the Federal Reserve begins a two-day meeting Tuesday after which it will provide forecasts for the benchmark interest rate for the first time.

“The important issue is how many investors will be participating in an agreement,” Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest bank, said about the Greece talks. “The flight to quality into Treasuries will not fade.”

The yield on the 10-year note fell three basis points, or 0.03 percentage point, to 2 percent as of 7:21 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 rose 8/32, or $2.50 per $1,000 face amount, to 100 1/32. The two-year yield dropped one basis point to 0.23 percent.

Japan’s 10-year yield advanced one basis point to 0.995 percent in Tokyo, the highest level since Dec. 28.

Financial markets in China, Hong Kong, Singapore, South Korea, Taiwan, Indonesia and Malaysia are shut for the Lunar New Year holiday Monday.

Dallara, managing director of the Washington-based Institute of International Finance, said in comments to Athens-based Antenna TV televised on Sunday that he’s hopeful the EU and IMF will agree to terms for private investor involvement in a rescue of Greece. He declined to elaborate on the terms discussed in talks that resumed January 18 and remained inconclusive as EU finance ministers prepared to meet in Brussels Monday.

Treasury 10-year yields may remain in a range from 1.7 percent to 2.1 percent, said Shimomura, adding that investors should consider buying bonds when rates are near 2 percent.

The Fed released last week blank templates showing the format of its forecasts for the benchmark rate, which will be provided to the public for the first time on January 25. It will offer two charts along with the forecasts, according to a statement released on January 20.

The first chart will use shaded bars to show in which year participants in the Federal Open Market Committee project that the central bank will first raise rates.

The second will show projections from each participant for the appropriate federal funds rate target at the end of the next three years and the longer run. The chart will indicate how quickly the central bank expects rates to rise once they are no longer in the range of zero to 0.25 percent.

The difference between two- and 10-year yields was 1.77 percentage points Monday after widening to as much as 1.79 percentage points on January 20, the most since December 13.

“We expect the steepening to continue,” Anshul Pradhan and Vivek Shukla, strategists at Barclays Plc, wrote in a note to clients dated January 20. “There is still scope for fed fund expectations for the next few years to be revised lower.”

The Treasury Department will sell $99 billion of notes this week starting with a $35 billion auction of two-year securities Tuesday. That will be followed by a sale of $35 billion in five-year debt on Jan. 25 and $29 billion of seven-year securities on January 26.

Two-year notes yielded 0.25 percent in pre-auction trading, compared with 0.24 percent at the previous auction December 19, the lowest since August. Investors bid for 3.45 times the amount on offer last month versus an average of 3.43 for the past 10 sales. [Bloomberg]

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