Bloomberg News

Treasuries Drop on Eased European Concern Before 10-Year Auction

September 13, 2011

Sept. 13 (Bloomberg) -- Treasury 10-year note yields advanced from almost a record low on eased concern Europe’s debt crisis may cripple the region’s banks before the U.S. government’s $21 billion auction of the securities.

Bonds fell for a second day as Greek Prime Minister George Papandreou planned to hold a conference call with German Chancellor Angela Merkel and French President Nicolas Sarkozy tomorrow on developments in Greece and the euro area. Italian borrowing costs increased at a bond sale today.

“There will be a little bit of caution going into the auctions, considering we are low in yields,” said Christopher Bury, co-head of fixed-income rates at Jefferies Group Inc., one of the 20 primary dealers obliged to participate in government auctions. “We could have more of a concession.”

Yields on 10-year notes increased four basis points, or 0.04 percentage point, to 1.99 percent at 12:04 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 dropped 11/32, or $3.44 per $1,000 face amount, to 101 7/32. The yield slid to a record low 1.8770 percent yesterday.

A decrease of one point in 30-year bonds pushed yields up five basis points to 3.31 percent. Two-year note yields were little changed at 0.20 percent. Yields on five-year notes gained two basis points to 0.89 percent.

The 10-year U.S. securities being sold today yielded 1.990 percent in pre-auction trading, compared with a record low 2.14 percent the last time the notes were sold Aug. 10.

Auction Demand

Investors bid for 3.22 times the amount of debt offered last month, versus the 10-auction average of 3.13. Indirect bidders, the group including foreign central banks, bought 35.4 percent, the least at the monthly sales since March 2010. Direct bidders, non-primary dealers buying for their own accounts, purchased 31.7 percent, three times the 10-sale average.

In Europe, Merkel told the Berlin broadcaster Inforadio that she won’t allow Greece to go into “uncontrolled insolvency” as members of her governing coalition call on her to allow the nation to declare itself bankrupt and exit the euro region. The currency bloc has no system for “orderly” insolvency until the permanent rescue fund is established in 2013, she said.

The cost of insuring against default on European sovereign and bank debt rose to records on concern a default by Greece will trigger losses for banks holding the government’s bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments increased one basis point to 355 basis points, an all-time high based on closing prices. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers rose two basis points to 316 after earlier reaching 326.

Insuring Greek Debt

Investors have to pay a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA.

The Greece swap level signals a 98 percent probability of default, assuming investors would recover 40 percent of the bonds’ face value were the nation to fail to meet its obligations. CMA, which is owned by CME Group Inc. and compiles prices from dealers in the credit-swaps market, cut its recovery assumption on Greece to 38 percent yesterday, on which basis Greece has a 95 percent chance of default.

Italy sold 3.9 billion euros ($5.3 billion) of notes due in September 2016 at an average yield of 5.60 percent, up from 4.93 percent at the previous auction in July.

U.S. government reports this week are forecast to show little or no inflation in August.

Producer Prices

Producer prices were unchanged after a 0.2 percent increase in July, according to the median forecast of 76 economists before tomorrow’s Labor Department figures. Consumer prices gained 0.2 percent last month following a 0.5 percent advance in July, a Sept. 15 report is forecast to show.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the break- even rate, was 1.95 percentage points. The 10-year average is 2.12 percentage points.

At its next policy meeting on Sept. 20-21, the Federal Reserve may decide to swap its holdings of short-term Treasuries with long-term securities in a bid to cut borrowing costs.

Dallas Fed President Richard Fisher said yesterday he probably won’t support further monetary easing, arguing that steps that would boost the recovery are the responsibility of fiscal authorities.

Treasuries have returned 8.4 percent in 2011, the most since 2008, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index has dropped 7.6 percent.

--With assistance from Abigail Moses in London. Editors: Dennis Fitzgerald

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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