Bloomberg News

Treasuries Decline for Third Straight Day on European Optimism

October 06, 2011

Oct. 6 (Bloomberg) -- Treasuries dropped for a third day as speculation European leaders are stepping up efforts to resolve the sovereign-debt crisis pared refuge demand.

Yields on 30-year bonds extended their increase from a two- year low after a report before tomorrow’s U.S. payrolls figures showed initial jobless claims rose less than forecast and Treasury Secretary Timothy F. Geithner said banks have strengthened. The European Central Bank will resume covered-bond purchases and reintroduce year-long loans for financial institutions to avoid a freezing of money markets.

“With the slight optimism coming out of Europe, we are seeing some glimmers of what we could expect in the Treasury market if we get some type of reasonable policy response,” said Kevin Flanagan, chief fixed-income strategist in Purchase, New York, at Morgan Stanley Smith Barney. “There is still a lot of global issues to be worked through.”

Yields on 30-year bonds increased 10 basis points, or 0.10 percentage point, to 2.95 percent at 5:04 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities maturing in August 2041 fell 2 5/32, or $21.56 per $1,000 face amount, to 115 25/32. Yields slid two days ago to 2.69 percent, the lowest level since January 2009.

A drop of almost one point in 10-year notes pushed yields up 10 basis points to 1.99 percent today, compared with a record low 1.6714 percent set on Sept. 23. Two-year yields rose one basis point to 0.26 percent.

‘Bring In Sellers’

“The markets have been pricing in a double dip, and the possibility of us not going down that route will bring in sellers,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors.

The Standard & Poor’s 500 Index advanced for a third day, rising 1.8 percent. Crude oil for November delivery increased 3.7 percent to $82.59 a barrel in New York.

Geithner told the Senate Banking Committee the nation’s financial firms have strengthened and there’s “absolutely” no chance of another collapse like the fall of Lehman Brothers Holdings Inc. in 2008.

U.S. government securities surged last quarter on speculation Greece was heading for a default and as the Federal Reserve announced its plan to replace shorter-term Treasuries with longer maturities to keep borrowing costs low.

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.

Pimco Performance

Bill Gross’s Pacific Investment Management Co. Total Return Fund, the world’s biggest mutual fund, is trailing the Vanguard Intermediate Term Bond Fund, an index fund, as some of the top investors were blindsided by the bond rally.

The Fed said on Sept. 21 that it would 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. It sold $8.87 billion of notes maturing from January to July 2012 today under what’s known as Operation Twist.

The central bank has an “implicit target” for 10-year note yields of 1.50 percent or less, Dominic Konstam, global head of rates research at Deutsche Bank AG in New York, wrote in a report sent via e-mail yesterday.

Mortgage rates in the U.S. have fallen, sending longer-term borrowing costs below 4 percent for the first time on record. The average rate for a 30-year fixed loan dropped to 3.94 percent in the week ended today from 4.01 percent, Freddie Mac said in a statement. That’s the lowest in the McLean, Virginia, company’s records dating to 1971.

Jobless Claims

Applications for jobless benefits rose to 401,000 in the week ended Oct. 1 from a revised 395,000 in the previous week, the Labor Department reported. The median forecast of 50 economists in a Bloomberg News survey was for an increase to 410,000 from a previously reported 391,000.

Nonfarm payrolls climbed by 55,000 workers last month after zero growth in August, according to the median forecast of 91 economists in a Bloomberg News survey before tomorrow’s report from the Labor Department.

“The big event of the week is going to be what we see in tomorrow’s jobs data,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market doesn’t seem to want to take any big bets before that.”

The Treasury Department announced today it plans to sell $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in auctions next week.

Covered Bonds

The ECB will spend 40 billion euros ($53 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12- and 13-month durations, ECB President Jean-Claude Trichet said at a press conference in Berlin after policy makers left the benchmark interest rate at 1.50 percent. Trichet will be succeeded by Italy’s Mario Draghi when his eight-year term expires Oct. 31.

The Bank of England’s nine-member Monetary Policy Committee raised the ceiling for debt purchases known as quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. The central bank last announced an increase in its bond program in November 2009, and the purchases ended in early 2010.

--With assistance from Lukanyo Mnyanda in Edinburgh and Wes Goodman in Singapore. Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporters on this story: Cordell Eddings in New York at ceddings@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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