U.S. 10-Year Notes Register First Monthly Gain Since January

U.S. 10-year notes had their first monthly gain since January as concern the Greek debt crisis will spread fueled demand for the safest government securities even as the U.S. economic recovery showed signs of accelerating.

Treasury yields fell yesterday as investors sought to guard against a breakdown in talks between Greece and the European Union and International Monetary Fund on 24 billion euros ($32 billion) in budget cuts. The Labor Department will report on May 7 that the U.S. economy added 190,000 jobs in April, the most since March 2007, according to the median forecast of 58 economists in a Bloomberg News survey.

“The U.S. can post good economic numbers and companies can post good earning numbers, but if this thing spirals out in Europe, then we too will feel it,” said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of the 18 primary dealers that trade with the Federal Reserve. “That’s why you’re having Treasuries rally.”

The 10-year note yield fell 6 basis points, or 0.06 percentage point, to 3.67 percent yesterday in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2020 rose 17/32, or $5.31 per $1,000 face amount, to 99 21/32.

The yield fell 15 basis points in April and reached 3.65 percent yesterday, the lowest level since March 23. The two-year note’s yield dropped 6 basis points last month to 0.96 percent.

Treasuries returned 0.7 percent in April as of April 29 after a loss of 0.9 percent in March, according to indexes compiled by Bank of America Merrill Lynch.

U.S. Growth

Barclays Plc estimated the duration of its U.S. Treasury Index will rise by 0.6 years, the smallest extension this year. The average extensions this year has been 0.9 years. Duration measures price sensitivity to changes in yield, and is partly a function of maturity.

U.S. gross domestic product increased at a 3.2 percent annual pace from January through March, the Commerce Department said yesterday. That was less than the 3.3 percent median estimate of 85 economists surveyed by Bloomberg News.

“Risk assets in general will find this to be encouraging,” said Keith Blackwell, an interest-rate strategist at primary dealer Royal Bank of Canada in New York. “That’s going to put upward pressure on yields.”

The inflation gauge used by the Fed that’s tied to consumer spending and strips out food and fuel costs climbed at a 0.6 percent annual rate in the first quarter, higher than the 0.5 percent median forecast in a separate Bloomberg survey.

Reversing Gains

“A few weeks ago you were pushing against the high end of that range and got rejected pretty firmly,” said Bill Bemis, a portfolio manager who helps oversee $40 billion in U.S. fixed income assets at Aviva Investors in Des Moines, Iowa, a unit of London-based insurer Aviva plc. “Now we believe you’re pushing against the bottom of it, and expect it to hold. We expect rates to be moving higher, and are positioned accordingly.”

The 10-year note yield will rise to 3.82 percent at the end of the quarter, according to a weighted average in a Bloomberg survey of 69 forecasters. The two-year note yield will climb to 1.15 percent by the end of June, according to a separate Bloomberg survey.

Futures on the CME Group Inc. exchange showed a 64 percent chance yesterday that the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by December, compared with 63 percent odds a week earlier. The central bank has kept the rate between zero and 0.25 percent since December 2008.

Greek Crisis

Bonds and stocks in Europe’s most indebted nations fell in the past week as Greece’s budget turmoil forced the country to seek a bailout from the European Union and the International Monetary Fund, and Standard & Poor’s downgraded Greece, Portugal and Spain. The euro fell to a one-year low on April 28.

“The big news is what’s going on overseas,” said Theodore Ake, head of Treasury trading at Societe General in New York. “That’s going to be a bigger story, we just have to see what the timing is on it.”

U.S. note sales this week totaled record $129 billion as President Barack Obama borrows unprecedented amounts to sustain economic growth.

The central bank’s pledge to keep borrowing rates near zero for an “extended period” is raising concern the stance will make it harder for the policy-setting Federal Open Market Committee to keep prices in check as the economy expands.

The Fed reiterated the promise after a meeting April 28, and Kansas City Fed President Thomas Hoenig dissented for a third straight time.

Hoenig said “it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the committee’s flexibility to begin raising rates,” according to the FOMC statement.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 2.40 percentage points.