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Treasuries climb as Greek debt turmoil boosts demand for safety

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(Bloomberg) — Treasuries surged along with German government bonds as concern Greece will exit the euro and trigger contagion across the region bolstered demand for the safest fixed-income securities.

Benchmark Treasury 10-year yields headed for the biggest decline in almost two years as the impasse in Europe dashed optimism that Greece would reach an agreement with its creditors. Treasuries had been falling this month as improving U.S. economic data boosted the case for the Federal Reserve to raise interest rates as early as September.

“Across the board, it is total risk-off,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “Part of the strong reaction we are seeing in Treasuries this morning is because on Friday the North American market went home expecting a Greece deal to be done or some extension to the current bailout, but we didn’t get that.”

The Treasury 10-year yield fell 14 basis points, or 0.14 percentage point, to 2.33 percent at 6:54 a.m. New York time, according to Bloomberg Bond Trader data. The 2.125 percent note due May 2025 climbed 1 7/32, or $12.19 per $1,000 face amount, to 98 6/32. The yield is set for the steepest decline since September 2013.

Tsipras rejected the latest aid proposals by creditors on Friday, announcing a referendum on them for July 5 and saying he would advocate a “no” vote. The country’s current bailout expires Tuesday, when it is due to pay back the International Monetary Fund. Greece shut its banks and imposed capital controls to avert the collapse of its financial system.

Reduce risk

“When you don’t know a lot of what could happen, the standard and rational response is to reduce your positions, reduce your risky bets and park your money somewhere safer,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland. “The only thing we really do know is we don’t know a lot of what could potentially happen.”

The U.S. 10-year note yield climbed to 2.49 percent on Friday, the highest level since June 11. It increased 22 basis points last week. Treasuries handed investors a loss of 1.6 percent this month through June 27, according to Bloomberg World Bond Indexes.

Net bearish bets on 10-year Treasury notes by hedge funds and other large speculators fell by more than half in the week through June 23 to 46,736 contracts.

German bonds rose, with 10-year yields dropping the most since August 2012. U.K. government bonds also advanced, with the 10-year gilt yield falling to its lowest level in more than a week.

Yields on Australian 10-year securities declined 10 basis points to 2.96 percent and those on similar-maturity Japanese bonds fell three basis points to 0.44 percent.

Conciliatory noises

While the moves in bonds were drastic, analysts said there could be some stabilization as markets are still pricing in a resumption of talks between Greece and its creditors.

“It is unlikely they will pay the IMF tomorrow, but I still believe they will get something done as the risks are too great of not getting the deal done,” BMO’s Sheridan said. “This morning there are more conciliatory noises coming out of Europe,” he said, adding that he thinks Greece will vote to stay in the euro.

Austria’s finance minister Johann Schelling said he hopes Greece returns to the negotiating table, while European Union Digital Commissioner Guenther Oettinger said, “We want to keep Greece in the euro area if we can.”

A report Monday will show U.S. pending home sales increased for a fifth month in May, according to the median forecast of economists in a Bloomberg survey. Labor Department data scheduled for release on July 2 will show employers added more than 200,000 jobs for the 15th time in 16 months in June, according to a separate Bloomberg survey of analysts.

There’s 57 percent chance the Fed will increase its benchmark rate from near zero this year, and a 20 percent probability of two or more quarter-point increases, CME Group data based on futures showed on June 27.

–With assistance from Chikako Mogi in Tokyo.