Bloomberg News

Treasuries Fall on Bets European Debt Turmoil Will Be Resolved

October 05, 2011

Oct. 5 (Bloomberg) -- Treasuries dropped, with 30-year bond yields extending their advance from a two-year low, as optimism European leaders are stepping up efforts to resolve the region’s debt crisis sapped demand for the safest assets.

U.S. debt securities extended their slide after a private report two days before the Labor Department’s payrolls figures showed companies added more jobs in September than economists forecast. European Union officials are working on plans to boost bank capital, the International Monetary Fund said.

“There’s hope that the European situation will get better and there will be some kind of backstop,” said Jeffry Feigenwinter, head of Treasury trading in New York at Societe Generale SA, one of the 22 primary dealers that trade government securities with the Federal Reserve. “We are at extreme levels in the market, and people are unwinding some trades.”

Yields on 30-year bonds increased five basis points, or 0.05 percentage point, to 2.85 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities maturing in August 2041 dropped 1 2/32, or $10.63 per $1,000 face amount, to 117 31/32. The yields fell yesterday to 2.69 percent, the lowest level since January 2009, before advancing eight basis points.

Rally in Stocks

The Standard & Poor’s 500 Index gained 1.8 percent after rallying yesterday. Crude oil futures surged 2 percent to $79.80 a barrel.

Benchmark 10-year note yields advanced seven basis points to 1.89 percent, compared with the record low 1.6714 percent reached on Sept. 23. Two-year note yields were little changed at 0.26 percent.

Government debt securities surged last quarter on speculation Greece is heading for a default and as the U.S. central bank prepared to buy longer-term Treasuries to counter an economic slowdown.

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.

The Fed purchased $1.369 billion of Treasury Inflation Protected Securities maturing from January 2018 to February 2041 today as part of its effort to support the economy by keeping borrowing costs low.

Rehn’s View

Bonds slid yesterday after the Financial Times cited European Union Economic and Monetary Commissioner Olli Rehn as saying finance ministers recognize the need for a “concerted, coordinated approach.” A spokesman for Rehn told reporters today there is no concrete plan to recapitalize banks.

“There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital, into the banking sector,” Antonio Borges, the IMF’s European department head, said today in Brussels.

Moody’s Investors Service followed its three-level downgrade of Italy by warning yesterday that euro-area nations rated below the top Aaa level may see their rankings cut.

Greeks walked off their jobs and as many as 20,000 marched through Athens’ central square to protest Prime Minister George Papandreou’s 6.6 billion-euro ($8.7 billion) austerity plan, challenging a government seeking European bailout funds to stave off default.

‘Primary Drivers’

“The issues in Europe are the primary drivers,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York. “The news that we are starting to inch closer to bank recapitalization suggests that from a positioning standpoint, reducing your portfolio duration isn’t the worst thing in the world.”

In the U.S., companies added 91,000 workers to payrolls in September after a revised increase of 89,000 in the previous month, ADP Employer Services said. The median forecast of 39 economists in a Bloomberg News survey was for a gain of 75,000.

“It’s encouraging to see jobs increase 90,000, but there’s an element of stagnation,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer.

U.S. Payrolls

The Labor Department is projected to report on Oct. 7 that nonfarm employers added 60,000 workers last month after zero growth in August. The unemployment rate stayed at 9.1 percent, a separate survey showed.

Growth in services industries in the U.S. slowed in September less than forecast. The Institute for Supply Management’s non-manufacturing index fell to 53 from 53.3 in August, the Tempe, Arizona, group reported. The median forecast of 75 economists in a Bloomberg News survey was for a drop to 52.8. A reading of 50 is the dividing line between expansion and contraction in services, the largest part of the economy.

Fed Chairman Ben S. Bernanke told U.S. lawmakers in Washington yesterday he’ll push forward with further expansion of monetary stimulus if needed, resisting pressure from Republicans concerned that he’s fanning inflation.

The central bank announced on Sept. 21 its plan to purchase $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.

--Editors: Dennis Fitzgerald

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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