Bloomberg News

Treasuries Fall Most in a Week After Debt-Ceiling Agreement

August 01, 2011

Aug. 1 (Bloomberg) -- Treasuries fell the most in more than a week after congressional leaders approved a plan to raise the debt ceiling, boosting stocks and ending a stalemate over U.S. government borrowing that threatened to result in a default.

Yields on 10-year debt rose from the lowest this year as lawmakers said an agreement was near and President Barack Obama went on to announce the pact on television late yesterday in Washington. A Chinese manufacturing index for July was higher than economists estimated, fueling optimism that the world’s second-largest economy will help drive global growth.

“Treasuries received a lot of support last week,” said Peter Chatwell, a fixed-income strategist in London at Credit Agricole Corporate & Investment Bank. “Now that there seems to be an agreement on the table, that flight to quality is diminishing. Investors are feeling a little more bullish, which is benefiting stocks and reducing demand for safe havens like bunds and Treasuries.”

The yield on the benchmark 10-year note climbed four basis points to 2.83 percent as of 6:24 a.m. in New York, according to Bloomberg Bond Trader prices. The security yielded 2.77 percent at the end of last week, the least since Nov. 30. The 3.125 percent note due in May 2021 slid 10/32, or $3.13 per $1,000 face amount, to 102 15/32.

Yields on two-year notes added two basis points to 0.38 percent while five-year yields increased four basis points to 1.39 percent. Thirty-year bonds yielded 4.17 percent, five basis points more than their previous close.

‘Appetite for Risk’

The MSCI Asia Pacific Index of shares snapped a three-day decline, gaining 1.4 percent, while futures on the Standard & Poor’s 500 Index added 1.3 percent. The Stoxx Europe 600 Index rose 0.7 percent.

Ten-year yields will increase to 3.55 percent by year-end, according to a Bloomberg survey of banks and securities companies.

“There’s an increased appetite for risk,” said Roger Bridges, who oversees the equivalent of $16.6 billion of debt as Sydney-based head of bonds at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. “Yields under 3 percent look expensive. They should be higher.”

Ten-year notes yield negative 71 basis points after accounting for inflation. The rate was negative 76 basis points on July 29, the least since October 2008.

Yield Spread

Obama warned July 25 of a “deep economic crisis” without a compromise over the budget. Congressional leaders are racing to push through a plan to raise the debt limit by at least $2.1 trillion and slash government spending by a minimum $2.4 trillion before a default threatened for as early as tomorrow. The House plans votes today and the Senate may follow suit.

The spread between two- and 10-year yields expanded to 2.45 percentage points, the first time in five days that the yield gap has widened. The average rate for borrowing and lending Treasuries for one day in the repurchase-agreement market was 21 basis points, the highest level since Feb. 1, according to index data provided by the Depository Trust & Clearing Corp.

Japan’s 10-year yield was little changed at 1.08 percent after falling to this year’s low of 1.06 percent on July 19. The Ministry of Finance is scheduled to sell 2.2 trillion yen ($28.3 billion) of the securities tomorrow.

Yields on 10-year German bunds increased four basis points to 2.58 percent after falling for each of the previous six trading days.

The U.S. probably failed to create enough jobs in July to cut unemployment, according to a Bloomberg News survey of economists before the Labor Department’s employment report on Aug. 5. Industry figures today will show U.S. manufacturing growth slowed last month, a separate survey showed.

China Manufacturing

Treasury investors became less bearish on their outlook for U.S. debt through year-end, according to a survey of money managers by Ried Thunberg ICAP Inc., the New Jersey-based unit of the world’s largest interdealer broker. The company’s sentiment index rose to 43 for the seven days ended July 29 from 42 the week before. A figure less than 50 indicates investors expect prices to fall.

Chinese data indicated Premier Wen Jiabao’s campaign to tame prices isn’t slowing the economic expansion and the nation is maintaining its contribution to global growth.

The Purchasing Managers’ Index was at 50.7 for July compared with 50.9 in June, the China Federation of Logistics and Purchasing said in a statement. The reading was more than every forecast in a Bloomberg News survey of 13 economists.

Investors from China to the U.K. were willing to lend money to the U.S. in July at the lowest rates of the year even as lawmakers debated how to raise the debt limit. For many, there are few non-U.S. alternatives, no matter what its credit rating.

Reserve Currency Status

Treasury yields average 0.72 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January. The dollar saw higher-than- average net inflows last week compared with the previous year, according to Bank of New York Mellon, which is the custodian for more than $20 trillion.

“There is no other country that can step in and replace the U.S. at the core of the system,” Mohamed El-Erian, the chief executive officer at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s largest bond fund, said July 25 in an interview on Bloomberg Television. “The U.S. is the supplier of the reserve currency.”

CUSIPS and due dates of U.S. debt due in August CUSIP DUE AMOUNT 912828FS4 Aug. 31 17.501 912828LV0 Aug. 31 43.262 9127952A8 Aug. 25 82.005 9127953E9 Aug. 18 87.42 9128277B2 Aug. 15 26.635 9127953D1 Aug. 11 93.29 9127953B5 Aug. 4 90.794 Total $440.907 billion

--Editors: Keith Campbell, Matthew Brown.

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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