Bloomberg News

Treasury 10-Year Yields Rise From Record on Eased Europe Concern

September 12, 2011

Sept. 12 (Bloomberg) -- Treasury 10-year note yields rose from a record low on speculation China may seek to buy more European bonds, easing the haven appeal of U.S. government debt from the Europe’s widening sovereign-debt crisis.

The U.S. government sold $32 billion of three-year securities at a record low yield in the first of three note and bond offerings this week totaling $66 billion. Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., increased his holdings of Treasuries to the highest since December 2010. U.S. stocks rose.

“There’s a story that China is contemplating buying Italian sovereign debt,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It places a little bit of hope in the market that someone sees some value out there. Obviously it’s better than Europe falling apart, which is what we hear every night.”

Yields on 10-year notes gained three basis points, or 0.03 percentage point, to 1.95 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 fell 1/4, or $2.50 per $1,000 face amount, to 101 19/32. The yields earlier touched 1.8770 percent, the lowest level on record in Federal Reserve data beginning in 1953.

The current three-year note yields increased four basis points to 0.33 percent. The yields on 30-year bonds were little changed at 3.25 percent.

Yield Versus Libor

The three-year note auction yield of 0.334 percent was lower than the London interbank offered rate, or Libor, for three-month loans in dollars, at 0.343 percent.

“That’s an indication of the impact that Fed policy is having on the curve,” said James Collins, an interest-rate strategist in the futures group in Chicago at Citigroup Inc., one of the 20 primary dealers obliged to participate in auctions. “Libor has been inching higher for several weeks now. Until the crisis mode eases in Europe, we’ll probably see it in the mid-0.30s.”

The last time the three-year yield fell below the three- month Libor rate was in the aftermath of the 2008 bankruptcy of Lehman Brothers Holdings Inc.

The three-month Libor rate has been below the two-year yield since Aug. 8, the day before the Fed said it would hold its overnight lending rate for loans between banks at zero to 0.25 percent through at least mid-2013.

Yields on benchmark 10-year notes increased after the Financial Times reported that the Italian government is holding discussions with Chinese investors on selling a “significant” amount of bonds.

China and Italy

China Investment Corp. Chairman Lou Jiwei was in Rome last week for discussions with Italian Finance Minister Giulio Tremonti and Italy’s Cassa Depositi e Prestiti, a government entity that has established an Italian Strategic Fund open to foreign investors, the FT said, citing unidentified Italian officials.

Italian officials have held talks with Chinese counterparts about potential investments in the euro region’s third-largest economy, an Italian government official said.

The purchase of Italian bonds by China was not the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity. A spokesman for Tremonti declined to comment.

Gain in Stocks

The Standard & Poor’s 500 Index increased for the first time in three days, rising 0.7 percent. Crude oil for October delivery rose 1.8 percent to $88.77 a barrel.

Treasuries rose earlier today as Lars Feld, an economic adviser to Germany’s Chancellor Angela Merkel, said decisions taken in July by European leaders “won’t suffice” to save Greece from missing a payment on its debt.

A haircut in the order of 50 percent will be necessary on Greek debt, and it’s better to go ahead “rather now than later,” Feld said today in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Germany’s government is discussing how to strengthen the nation’s banks in case Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, officials said Sept. 9.

“There’s this ever-present flight-to-quality bid out there,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “We’ve moved powerfully.”

Merkel and European Commission President Jose Barroso agreed on the “paramount” importance of the euro, the German government said after the two met in Berlin today.

Bund Spread

Treasuries have underperformed bunds, with the extra yield investors get to hold 10-year U.S. notes instead of their German counterparts increasing to 19 basis points, the widest spread since Aug. 5.

At today’s government three-year auction, the yield of 0.334 percent was the lowest on record for the maturity, compared with the average forecast of 0.335 percent in a Bloomberg News survey of eight primary dealers.

“It’s a good auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., a primary dealer. “It seems like there’s another shoe that drops with Europe every day, so it’s a constant concern in the U.S. marketplace.”

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.15, compared with an average of 3.18 for the past 10 sales of three- year notes.

Indirect Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 35.7 percent of the notes, compared with 47.9 percent at the August sale of the notes and an average of 35.8 percent for the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.6 percent of the securities, compared with an average of 13.2 percent for the past 10 auctions.

The Treasury is scheduled to sell $21 billion in 10-year debt tomorrow and $13 billion of 30-year bonds on Sept. 14. The entire amount raised this week is new cash, with none of the proceeds dedicated to redeeming maturing securities, according to the Treasury Department.

Pimco’s $245 billion Total Return Fund raised its holdings of government and Treasury debt to 16 percent last month from 10 percent in July, according to data posted on the Newport Beach, California-based company’s website today. Mortgage holdings climbed to 32 percent from 25 percent.

The seven-day relative strength index for the 10-year note yield dropped below 30 on Sept. 9 for the first time since Aug. 19. A reading less than that level indicates a security may be poised for a change in direction. The index was at 35.08 today.

--Editors: Dennis Fitzgerald, Dave Liedtka

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