Treasuries Rise as George Soros Warns Euro Is at Risk

By Wes Goodman - Jun 25, 2012 9:04 AM GMT+0700

Treasuries rose, snapping a decline from last week, after billionaire investor George Soros warned the euro may dissolve if European Union leaders fail to curb the region’s debt crisis at a two-day summit starting June 28.

Soros called on Europe to start a fund to buy Italian and Spanish bonds in return for budget cuts in the nations, speaking in an interview in London yesterday. Demand for the safest assets as European governments try to find ways to pay their debts has helped Treasuries beat all other U.S. fixed-income securities for the first time in three quarters.

“The ideal thing will be for EU leaders to lay out a grand plan for fiscal union, but the suspicion is that they will again fall short of that,” said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd. (NAB), the nation’s largest lender by assets. “That’s going to keep Treasury yields low.”

The U.S. 10-year yield declined two basis points, or 0.02 percentage point, to 1.66 percent as of 11:02 a.m. in Tokyo, Bloomberg Bond Trader data show. The 1.75 percent note due in May 2022 advanced 5/32, or $1.56 per $1,000 face amount, to 100 27/32. The rate increased 10 basis points last week.

Treasury 10-year notes will yield 2 percent at year-end, Jolly said, versus the average of 3.78 percent over the past decade.

Japan’s 10-year rate was unchanged at 0.825 percent. It was as low as 0.79 percent on June 4, a level not seen since 2003.

Comparative Returns

U.S. government debt has gained 2.9 percent since March, while corporate bonds returned 1.9 percent, mortgages rose 1 percent and municipal bonds increased 1.8 percent, according to Bank of America Merrill Lynch index data.

European leaders are running out of time to show investors they will do what’s necessary to save their currency, Soros said.

“There is a disagreement on the fiscal side,” Soros said in an interview with Bloomberg Television’s Francine Lacqua. “Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco. That could actually be fatal.”

Italy plans to sell inflation-linked securities maturing in 2016 and 2026 tomorrow as well as 3 billion euros ($3.76 billion) of zero-coupon bonds. Spain will auction three- and six-month bills tomorrow.

Government bonds losing their risk-free status are depriving investors of wealth-preservation opportunities as Europe’s debt crisis boosts demand for havens, according to the Bank for International Settlements.

The global pool of safer assets “has shrunk just as demand has risen due to a flight to safety, leading to a major shortage of safe assets in the global financial system,” the BIS said in its annual report in Basel, Switzerland.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.