Credit Suisse: US Treasurys' 'Haven Demand' to Persist

Tuesday, 08 May 2012 03:33 PM

 

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Global investors’ demand for the relative safety of U.S. Treasurys will continue, pushing yields lower, amid concern Europe’s debt crisis will worsen, according to Credit Suisse Group AG’s Ira Jersey.

“The flight-to-quality bid for Treasurys just seems to continue until Europe and some of the other macro-contagion issues work themselves out,” Jersey, an interest-rate strategist in New York, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Internationally, the flows are into Treasurys. There is a lack of appetite to take risk.”

Treasurys rose for a third day as Greek leaders struggled to form a government after elections on the weekend raised the prospect of the country withdrawing from the region’s currency bloc, adding to haven demand.

Ten-year note yields fell to as low as 1.81 percent in New York trading and 30-year bond yields touched 3 percent, the lowest levels since February, as Greece faced the prospect of becoming the first developed nation to default on its debt.

Rates will probably hold steady near record lows even beyond June, when the Federal Reserve finishes swapping $400 billion of short-term debt for longer-term securities in a program known as Operation Twist, based on a measure of volatility in three-month options for U.S. 10-year interest-rate swaps. The so-called 3m10y swaption rate is about the lowest since June 2007, when the housing bubble burst.

‘Low-Volatility Environment’

“Volatility has steadily been falling,” Jersey said. “The low-volatility environment in the United States is because we are kind of reaching a level where we don’t find many who really want to buy, but we find a situation where people have to buy. That’s a situation where yields will probably see a floor somewhere,” possibly around the 1.79 percent area, he said.

Swaptions, as options on an interest-rate swaps are known, provide a way to hedge interest-rate risk. In a swap, two parties agree to exchange fixed- for floating-based payments over a period of time. Normalized volatility signals traders’ expectations for fluctuations in swap rates by adjusting the implied volatility of the option by the interest rate struck on the swaption.

Credit Suisse forecasts the 10-year Treasury yield will end the year at 2.5 percent.

“We are looking for higher yields by year-end,” Jersey said. “Maybe that’s our optimistic standpoint that Europe can at least stabilize a little bit.”


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