Bloomberg News

Treasury 10-Year Yields Rise Most Since July on European Outlook

September 17, 2011

Sept. 17 (Bloomberg) -- Treasuries dropped, pushing 10-year note yields up the most in more than two months, after the European Central Bank coordinated with the Federal Reserve and other central banks to maintain liquidity for the euro area’s financial institutions.

Yields on 10-year notes pared this week’s advance from a record low after European finance ministers conferring yesterday in Poland ruled out economic stimulus. The Federal Reserve may decide at its two-day policy meeting next week to replace holdings of shorter-term Treasuries with longer maturities to keep borrowing costs low and support the recovery.

“We’ll be prone to volatility,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “In times like these, people want guidance, and they want to hear what the Fed’s thinking.”

Yields on 10-year notes increased 13 basis points, or 0.13 percentage point, to 2.05 percent this week, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 dropped 1 5/32, or $11.56 per $1,000 face amount, to 100 22/32.

The five-day gain in yields was the biggest since July 1, when they advanced 32 basis points. The yields fell on Sept. 12 to a record low 1.8770 percent. Yields on 30-year bonds rose seven basis points to 3.31 percent this week.

Bond Rally

U.S. debt securities have rallied in 2011 as speculation Europe’s sovereign-debt crisis will cripple the region’s financial institutions and evidence of a stalled U.S. economic recovery spurred demand for the safest assets.

The government auctioned $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds at record low yields this week.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said Sept. 14 in a statement that they’re “convinced” Greece should stay in the euro region as they faced international calls to step up efforts to stem the region’s debt crisis.

The ECB said the next day it will work with the Fed and other central banks to lend euro-area financial institutions dollars, damping demand for a refuge.

U.S. 30-year bonds rose yesterday as European finance ministers meeting in Wroclaw, Poland, rejected efforts to prop up the faltering economy and gave no indication of providing aid for lenders to go along with the ECB liquidity lifeline.

Geithner in Europe

Treasury Secretary Timothy F. Geithner said yesterday at the conference that leaders need to work together to avoid setting off a “protracted” slump. He said Europe must “choose” to solve its debt crisis so its fate doesn’t rest with financial markets or the nations that back the International Monetary Fund.

He flew from Washington for the day to meet with EU finance ministers and central bankers in his first-ever appearance at one of their scheduled meetings.

At its Sept. 20-21 meeting, the Fed may decide to increase its holdings of longer U.S. government maturities under what is known as Operation Twist after an initiative during the administration of President John F. Kennedy.

“We are in favor of taking a bet on the Fed and advise investors to buy long,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, referring to 30- and 10-year securities.

Fed Outlook

The Fed may also lower its interest payments on excess reserves deposited by banks, which may encourage demand for shorter maturities such as two-year notes.

The difference in yield between 10-year Treasuries and inflation-protected debt, a measure of the outlook for consumer prices known as the break-even rate, was 1.97 percentage points after falling this week to 1.90 percentage points, the lowest level since October 2010.

Consumer prices advanced 0.4 percent in August after a gain of 0.5 percent in the previous month, the Labor Department reported this week. The median forecast of 84 economists in a Bloomberg News survey was for an increase of 0.2 percent.

China, the largest foreign lender to the U.S., boosted its holdings of U.S. Treasuries in July to $1.17 trillion, the highest level in nine months. China’s trade surplus surged that month to the highest level in more than two years.

Investors in China added Treasuries even as President Barack Obama and Republicans in Congress clashed over the U.S. debt ceiling. Obama signed a bill raising the limit Aug. 2.

“They continue to buy notes and bonds every month because they’ve got so much money,” said David Ader, head of government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC. “If they stopped buying, they wouldn’t have much else to do with the cash, so they buy.”

--With assistance from Cordell Eddings and Daniel Kruger in New York. Editors: Dennis Fitzgerald, Greg Storey

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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