Bloomberg News

Treasuries Decline on Bets Europeans Will Contain Debt Turmoil

October 04, 2011

Oct. 4 (Bloomberg) -- Treasuries dropped, pushing 30-year bond yields up from the lowest level in more than two years, on expectations that European Union officials may coordinate the recapitalization of banks.

Benchmark 10-year note yields rose on a Financial Times report after dropping yesterday the most in eight weeks. Federal Reserve Chairman Ben S. Bernanke told lawmakers the central bank is ready do more to boost the economy. The central bank bought $4.59 billion of debt due from November 2019 to August 2021 under the program known as Operation Twist.

“People are looking for optimism anywhere they can get it right now,” said Christopher Bury, co-head of fixed-income rates at Jefferies Group Inc., one of the 22 primary dealers that trade with the Fed. “You have these random stories, and the market reacts.”

Yields on 30-year bonds increased eight basis points, or 0.08 percentage point, to 2.81 percent at 5:06 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 slid 1 25/32, or $17.81 per $1,000 face amount, to 119. The yields earlier today advanced 10 basis points after touching 2.69 percent, the lowest since January 2009.

Gain in Stocks

The Standard & Poor’s 500 Index gained 2.3 percent after earlier falling 2.2 percent. Crude oil for November delivery erased its drop, rising 0.4 percent to $77.88 a barrel.

The report in the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign-debt crisis.

U.S. debt securities pared their drop after Italy had its government bond rating cut to A2 from Aa2 by Moody’s Investors Service. The outlook is negative.

The 10-year note yields advanced seven basis points to 1.82 percent after falling 16 basis points yesterday, the most since Aug. 8. Yields touched a record low 1.6714 percent on Sept. 23. Two-year note yields were up two basis points to 0.25 percent.

The five-day relative strength index for 10-year note yields dropped yesterday below 30 for the first time since Sept. 22, according to data compiled by Bloomberg. A reading less than that level indicates an asset may be poised for a change in direction. The index rose today to 34.90.

Client Survey

A JPMorgan Chase & Co. client survey for the week ended Oct. 3 showed 11 percent net longs on Treasuries, the highest level since Dec. 6, 2010, according to the firm, a primary dealer. The share of outright shorts was 2 percent, the lowest since June 25, 2007. Neutrals totaled 85 percent, the same as in the previous week.

Bernanke’s remarks before Congress’s Joint Economic Committee signaled the Fed may not be finished after attempts to bolster record monetary stimulus with unconventional tools.

The Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said.

Responding to a question, he said the central bank has no immediate plans for another round of large-scale asset purchases known as quantitative easing. At the same time, he said, the Fed hasn’t taken “anything off the table.”

The central bank announced on Sept. 21 its plan to buy $400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities due in three years or less.

Payrolls Report

The U.S. added 58,000 jobs in September after zero growth in the previous month, according to the median forecast of 84 economists in a Bloomberg News survey before the Labor Department’s Oct. 7 payrolls report.

Government debt surged in the third quarter, led by 30-year bonds on concern Greece is heading for a default and as the Fed prepared to buy longer-term Treasuries to counter a slowdown in the U.S. economy.

The long bonds returned 31 percent, the most since the depths of the financial crisis in December 2008, Bank of America Merrill Lynch indexes showed. The S&P 500 Index tumbled 14 percent.

Yields on 30-year bonds decreased 146 basis points in the third quarter, the most since falling 164 basis points in the last three months of December 2008.

European Meeting

A seven-hour meeting of euro-area finance chiefs yesterday produced an agreement to pursue “technical revisions” to a July accord on private sector burden sharing, Luxembourg Prime Minister Jean-Claude Juncker told reporters today. He spoke of “changes” to the Greek outlook that spurred the reassessment.

Juncker gave no details about a possible recalibration of the “voluntary” debt exchange, the new element in the follow- up package hammered out after last year’s 110 billion euro lifeline failed to stabilize Greece.

The Institute of International Finance, an industry group, estimates that the debt swap, still being negotiated, will amount to a writedown of 21 percent.

Ministers pushed back a decision on the release of Greece’s next loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of a lifeline granted last year.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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