Bloomberg News

Treasuries Gain as Moody’s Cuts Ireland Credit Rating to Junk

July 12, 2011

July 12 (Bloomberg) -- Treasuries rose as Moody’s Investors Service lowered Ireland’s credit rating to junk, fueling concern that the European sovereign-debt crisis will spread and dampen investors’ appetite for higher-risk assets.

U.S. government bonds rebounded after giving up gains earlier as concern had eased that the European crisis was worsening and the U.S. sold $32 billion of three-year debt in the first note auction since the Federal Reserve’s $600 billion of Treasury purchases ended June 30.

“It’s all about what’s going on in Europe; this is just another shoe dropping,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “There is still fear in the marketplace that is keeping Treasuries bid, despite ongoing supply and the Fed not being in the marketplace.”

Ten-year yields fell four basis points, or 0.04 percentage point, to 2.88 percent at 4:37 p.m. in New York, according to Bloomberg Bond Trader prices. They dropped earlier to 2.81 percent, the lowest level since December. The 3.125 percent security due in May 2021 rose 10/32, or $3.13 per $1,000 face amount, to 102 2/32.

The yield on the current three-year note declined two basis points to 0.59 percent. It fell six basis points earlier to 0.55 percent, the least since November.

U.S. stocks fell after Ireland became the third euro-area country cut to non-investment grade, joining Portugal and Greece. Moody’s said in a statement the “key driver” of the decision was the “growing possibility” Ireland will need more financial aid after its current rescue package from the European Union and International Monetary Fund runs out in 2013.

‘Such Instability’

The Standard & Poor’s 500 Index declined 0.4 percent after gaining as much as 0.6 percent.

“European sovereign developments continue to dictate valuations in markets around the world,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Co. in New York. “It is hard to handicap economic fundamentals which should be driving market when there is such instability in the geopolitical and policy arena. We are in the middle of Treasury supply, and the bond market is rallying.”

Ten-year note yields touched their lowest level of the day earlier as investors sought safety after a meeting of euro-area finance ministers yesterday failed to quell the region’s escalating sovereign-debt crisis, which began in Greece.

Spanish, Italian Bonds

Spanish and Italian government 10-year bond yields reached 13-year highs before erasing today’s increases and falling as former Bank of England policy maker Willem Buiter, now chief economist at Citigroup Inc., said the European Central Bank will revive a bond-buying program to safeguard this week’s auction of Italian bonds.

Today’s sale of Treasury three-year debt, the first of three offerings of notes and bonds this week totaling $66 billion, drew the highest demand from direct bidders, or non-primary dealer investors, since December.

The auction drew a yield of 0.670 percent, versus the average forecast of 0.680 percent in a Bloomberg News survey of 10 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.22, versus an average of 3.14 for the past 10 sales.

“There was strong demand across the board, given what’s going on around the world and the concession we had in the bond market,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of the 20 primary dealers that are obligated to bid in U.S. debt auctions.

Foreign Central Banks

Indirect bidders, an investor class that includes foreign central banks, bought 34.5 percent of the notes, compared with an average of 34.7 percent for the past 10 sales. Direct bidders purchased 16.5 percent, compared with an average of 12.8 percent for the past 10 auctions.

The June offering of the debt drew a yield of 0.765 percent. The Treasury is scheduled to sell $21 billion in 10- year debt tomorrow and $13 billion of 30-year bonds on July 14.

Today’s auction came three weeks before the Aug. 2 debt- ceiling deadline as Republican and Democratic congressional leaders try to agree on cutting deficits and raising the government’s $14.3 trillion limit on borrowing.

President Barack Obama said yesterday at a White House press conference he’ll continue to press congressional leaders for “the largest possible deal” on a package of deficit cuts in the negotiations. Obama said he won’t sign a short-term extension of the debt limit.

Fed Minutes

U.S. stocks briefly rose today after minutes of the Fed’s last meeting showed policy makers disagreed on whether further stimulus will be needed if the economy remains weak.

Some officials at the central bank’s Federal Open Market Committee meeting June 21-22 said the Fed “might have to consider providing additional monetary stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run,” minutes released today showed. Others thought the next focus might be “steps to begin removing policy accommodation,” the minutes showed.

The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008 to support the economy. Its Treasury-purchase program to spur growth under a second round of quantitative easing ended on schedule June 30.

“The piece that stands out is that QE3 was discussed more than originally thought,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “What it tells you in the end is that the Fed will be patient and remain on the sideline until they get a clearer picture of where we are going.”

The U.S. yield curve, the gap between two- and 10-year Treasury note yields, flattened for a sixth straight day, the longest since May. It decreased to 2.53 percentage points, down from a high this year of 2.93 percentage points on Feb. 7.

--Editors: Greg Storey, Robert Burgess

To contact the reporter on this story: Cordell Eddings in New York at

To contact the editor responsible for this story: Dave Liedtka at

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