Bloomberg News

Treasury 10-Year Yield Drops to 2011 Low on Slower Manufacturing

August 01, 2011

Aug. 1 (Bloomberg) -- Treasuries advanced, pushing the yields on 10-year notes to the lowest level since November, as an index showed U.S. manufacturing expanded in July at the slowest pace in two years.

U.S. debt rallied as congressional leaders prepared a vote to reduce government spending and raise the debt limit, curtailing the risk of a default. The difference between the yields on two- and 10-year notes decreased to 2.36 percentage points, the narrowest since December 2010.

“We’ve turned from budget crisis to economic crisis,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “We’ve gone from worrying about a budget and default to the economy long term. Higher prices are bringing in buyers, not sellers.”

Yields on benchmark 10-year notes fell five basis points, or 0.05 percentage point, to 2.74 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 gained 14/32, or $4.38 per $1,000 face amount, to 103 8/32.

The 10-year note yields touched 2.72 percent, the lowest level since Nov. 12, 2010. Yields on two-year notes gained one basis point to 0.37 percent after falling to 0.34 percent, the lowest level since July 12. Credit-default swaps on U.S. debt dropped today to 54 from 62, according to CMA.

Debt Votes

The Treasury Department has said it will breach the $14.3 trillion borrowing limit and run out of options for avoiding default tomorrow without action by Congress to raise the debt ceiling. The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle between Obama and Republicans.

The U.S. still faces the threat of a credit-rating downgrade, said Peter Fisher, head of fixed income in New York at BlackRock Inc., in an interview on Bloomberg Television.

“Politicians went too far with the threat of default,” Fisher said. Even with the pending agreement, the U.S. remains “right on the cusp” of a downgrade, he said.

Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”

Bill Rates

Rates on the $90 billion in six-month bills due Aug. 4 dropped today to 0.19 percent. The rate rose to 0.3 percent on July 29, the highest since they were issued in February, signaling investors were concerned Congress wouldn’t raise the debt ceiling by the deadline.

At an auction today, the U.S. Treasury Department sold $27 billion in three-month bills at a rate of 0.115 percent, the highest since February. Investors bid for 4.51 times the amount of securities offered, the highest since July 5. The Treasury also sold $24 billion in six-month bills at a rate of 0.15 percent, the highest since March. Investors bid for 4.82 times the amount offered, the most since July 11.

Rates for borrowing and lending Treasuries in the repurchase-agreement market rose to a two-year high. The average level of overnight Treasury general collateral repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker, was 0.32 percent today, up from 0.21 percent at the same time on July 29 and the highest since March 2, 2009.

Borrowing Plans

The Treasury Department reduced its estimate for government borrowing from July to September to $331 billion, reflecting lower spending.

The current quarter’s borrowing projection is $74 billion less than estimated three months ago, the department said in a statement today in Washington. The Treasury also projected borrowing of $285 billion from October through December. In the quarter that ended June 30, the Treasury borrowed $190 billion, compared with a previous estimate of $142 billion.

The Institute for Supply Management’s factory index fell in July to 50.9, the lowest since July 2009, from 55.3 in the previous month. The median forecast of 80 economists in a Bloomberg News survey was for a decrease to 54.5.

Jobs Report

An Aug. 5 report from the Labor Department may show U.S. payrolls added 85,000 jobs in July, compared with 18,000 in the previous month, according to the median forecast of economists in a Bloomberg News survey.

“All eyes will be on the jobs situation come Friday,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Fed funds futures indicated an 9.2 percent chance the U.S. central bank will raise its target rate for overnight lending between banks by year-end, down from a 13.2 percent probability a month ago. The fed funds target has stayed at zero to 0.25 percent since December 2008.

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.

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

--With assistance from Daniel Kruger and Liz Capo McCormick in New York. Editors: Dennis Fitzgerald, 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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