Bloomberg News

U.S. 30-Year Yields Drop Most Since 2010 as Obama Endorses Plan

July 19, 2011

July 19 (Bloomberg) -- Treasury 30-year bond yields fell the most since 2010 after President Barack Obama endorsed a deficit-cutting proposal by a bipartisan group of senators that would end a stalemate on the U.S. debt ceiling.

The difference in yields between 10- and 30-year securities narrowed from the widest level since November on optimism lawmakers are more likely to tackle long-term deficit reform. Bonds earlier rallied after the International Monetary Fund said Greece’s sovereign-debt crisis risks infecting the rest of the euro region even if officials head off a default, bolstering the refuge appeal of U.S. government debt.

“The upside in Treasuries has been a function of this new, more robust proposal from the Gang of Six,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s a reasonable amount of perceived momentum behind that, the concept being that’s the type of proposal needed to keep the credit-rating agencies at bay.”

Thirty-year bond yields dropped 12 basis points, or 0.12 percentage point, to 4.19 percent at 5:03 p.m. in New York, according to Bloomberg Bond Trader prices. They tumbled as much as 13.4 basis points, the biggest intraday decrease since December 2010. Yields rose earlier to 4.34 percent, the highest level since July 8. The 4.375 percent security due in May 2041 climbed 2, or $20 per $1,000 face amount, to 103 1/8.

Yields on benchmark 10-year notes fell five basis points to 2.88 percent. Earlier they rose to 2.97 percent. The yields have traded between 2.87 percent and 2.98 percent since July 12.

Negative Rates

Rates on one-month bills briefly fell below zero for a second day, touching negative 0.0051 percent, before trading at 0.0051 percent. They reached negative 0.0101 percent on July 14, matching the lowest level since January 2010.

The cost of insuring Treasuries with credit-default swaps fell about two basis points to 54.1 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

House Republicans still planned a vote on a proposal to condition a $2.4 trillion debt-ceiling increase on passage of a constitutional amendment to balance the budget. Senate Democrats oppose the idea, and Obama said he would veto it.

With no immediate compromise offering a way out of a stalemate and the Aug. 2 debt-limit deadline two weeks away, the bipartisan group of senators called the Gang of Six pitched its own plan to cut about $3.7 trillion from the debt over 10 years.

About 50 senators attended their briefing at the Capitol today, an indication of potentially widespread support for a plan to reduce the debt through a combination of tax increases and entitlement cuts.

Inflation Speculation

The gap between yields on 10- and 30-year Treasuries narrowed by 0.07 percentage points to 1.31 percentage points, from 1.38 yesterday. Investors who had bet on a rise in longer- maturity yields relative to shorter-term debt reversed those trades on speculation a debt agreement would help limit the supply of Treasuries and keep inflation contained.

“The bond is going ballistic,” Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York, said of the 30-year security. The firm is a unit of Toronto-Dominion Bank. “They seem to be buying into this, but it’s just the market caught with the wrong position. They’re short the bond.” A short position is a bet that a security will fall.

Provisions in the debt compromise for $1.2 trillion in new taxes are likely to make the Gang of Six plan impossible to get through the Republican-controlled House of Representatives, Gilhooly said.

‘Not Going to Fly’

“They don’t want any tax increases,” Gilhooly said. “This is not going to fly.”

Investors still speculate Obama and lawmakers will reach an agreement on the debt ceiling, even as Moody’s Investors Service and Standard & Poor’s put the U.S. debt rating on review for downgrade last week, increasing the pressure to come to an accord.

While talks led by Vice President Joseph Biden beginning on May 5 made little visible progress, investors are “very confident that there’s going to be some package,” said Adam Brown, director of Treasury trading at Barclays Plc in New York, one of 20 primary dealers that trade with the Federal Reserve. “I don’t think anyone really thinks the U.S. is going to default.”

The U.S. debt ceiling “adds a small probability of default that would not otherwise exist,” Moody’s Investors Service said yesterday in a report.

Uncertainty Level

Congress has raised or revised the debt limit 78 times since 1960, according to the Treasury. Still, “the currently wide division between the House of Representatives and the Obama administration over the debt limit creates a higher level of uncertainty and causes us to raise our assessment of event risk,” Moody’s said.

Treasuries fluctuated earlier amid conflicting statements on Europe’s sovereign debt crisis. Yields rose after Greek Finance Minister Evangelos Venizelos said it can be resolved. U.S. debt pared losses after German Chancellor Angela Merkel said there won’t be a single “spectacular” step at the July 21 European summit on the problem. Bonds rallied after an IMF staff report said the Greek crisis may spread.

Investors have continued to buy Treasuries this year as Obama and Republicans in Congress have jousted over defaults and deficits because problems with European debt have been more grave, said Richard Schlanger, vice president of Pioneer Investments in Boston.

“They’re continuing to play ‘Ring Around the Rosie’ and not address problems,” Schlanger said. “I think this thing is going to continue to drag on.”

--Editors: Greg Storey, Dave Liedtka

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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