Bloomberg News

U.S. 30-Year Bonds Gain First Time in 3 Days on Debt-Deal Bets

July 22, 2011

July 22 (Bloomberg) -- Treasury 30-year bonds rose for the first time in three days amid speculation President Barack Obama will reach a deal with lawmakers to cut the U.S. budget deficit, raise the borrowing limit and avert a default.

The gains came before House Speaker John Boehner withdrew from negotiations with the White House, saying “we couldn’t connect.” Benchmark 10-year yields, which fell below 3 percent, were more than 1 percentage point lower than the average for the past decade as investors bet the U.S. will maintain its debt payments and keep its top-level credit rating. Treasuries fell yesterday as European Union leaders agreed on a plan to rescue Greece and stem the spread of the debt crisis in the region.

“There’s hope that we’ll get some agreement at some point,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 20 primary dealers that trade Treasuries with the Federal Reserve. “People think the stakes are too high and something has to be done. The market is stubbornly bid again.”

Yields on 30-year bonds were down five basis points, or 0.05 percentage point, to 4.26 percent at 6:13 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 4.375 percent securities due in May 2041 increased 29/32, or $9.06 per $1,000 face amount, to 101 31/32.

Benchmark 10-year note yields fell five basis points to 2.96 percent. The average for the past decade is 4.06 percent.

Boehner, Obama

Boehner said in a letter to colleagues released at 6 p.m. that he’ll talk with Senate leaders on a way to avoid a U.S. default. Obama summoned top lawmakers to the White House tomorrow at 11 a.m.

Treasuries gained earlier as House Ways and Means Committee Chairman Dave Camp predicted Congress will raise the $14.3 trillion debt ceiling before the government’s borrowing authority runs out Aug. 2. He spoke in an interview on “Political Capital with Al Hunt” airing on Bloomberg Television this weekend.

Obama said Congress must raise the federal debt ceiling. “Defaulting is not an option,” he said at a town hall meeting at the University of Maryland in College Park.

“There’s been positive vibes in Washington indicating progress is being made,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. “That usurped the European situation and brought a bid.”

The Obama administration told congressional leaders it was pursuing an agreement to raise the debt limit and cut deficits by about $3 trillion without immediate revenue increases, according to two officials familiar with the talks.

Standard & Poor’s reiterated yesterday the U.S. may lose its AAA credit rating as soon as August as the risk of a default escalates amid political wrangling to lift the debt limit.

‘Credible Solution’

S&P said in a report that even if Congress raises the limit in time to avert a default, it might lower the U.S. sovereign rating to AA+ with a negative outlook if a deal isn’t accompanied by a “credible solution” on the debt burden.

BlackRock Inc., which manages $3.7 trillion in assets, said the U.S. risks losing its top credit rating because the nation’s debt is “so significant,” according to Rick Rieder, chief investment officer for fixed income.

“The debt load in the U.S. is so large,” Rieder said in an interview on Bloomberg Television’s “Inside Track” with Deirdre Bolton and Erik Schatzker. Part of the reason the U.S. risks losing “the AAA, it’s not necessarily the debt ceiling, it’s the fact that our debt in this country is so significant.”

Fed Purchase

The Fed bought $869 million of Treasuries today due from August 2021 to February 2041, according to its web site. The central bank is investing the principal payments from its debt holdings in Treasuries to help spur the economy.

Treasuries fell for the week, with 10-year note yields up six basis points, as European efforts to stave off a Greek default lowered demand for the safety of U.S. debt.

The securities tumbled yesterday as European leaders redoubled efforts to end the 21-month sovereign-debt crisis.

Officials announced 159 billion euros ($229 billion) in new aid for Greece with lower interest rates and longer repayment times. They empowered their 440-billion euro rescue fund to buy debt across stressed nations, helping erect a firewall around Spain and Italy even as they risked temporary default to lighten Greece’s debt burden. They also cajoled bondholders into footing part of the bill.

Ten-year swap spreads narrowed to 10 basis points today, the lowest since May 30 based on closing levels. In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed component and the yield on similar-maturity Treasuries.

Refuge Demand

Treasuries returned 2.8 percent over the past three months, Bank of America Merrill Lynch data show, as Europe’s debt crisis spurred demand for the safest securities. The Standard & Poor’s 500 Index gained 1.1 percent.

Economists have cut their forecasts for Treasury yields as U.S. gross domestic product growth slowed.

The pace of economic expansion slipped to 1.8 percent in the second quarter, a Bloomberg News survey showed before a Commerce Department report July 29. Growth slowed from 3.1 percent in the final three months of 2010 to 1.9 percent in the first quarter of 2011.

The 10-year yield will rise to 3.54 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings. The median projection in June was for 3.65 percent.

--With assistance from Lucy Meakin in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net.

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


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