Bloomberg News

Treasuries Fall a Fifth Day on Bets Europe Will Contain Crisis

October 11, 2011

Oct. 11 (Bloomberg) -- Treasuries fell for a fifth day amid speculation Europe’s leaders will be able to contain the region’s sovereign-debt crisis and as the U.S. began selling $66 billion in notes and bonds this week.

Three-year note yields were at almost a two-month high as the U.S. auctioned $32 billion of the securities. The notes drew a yield of 0.544 percent, compared with the average forecast of 0.540 percent in a Bloomberg News survey of 11 of the Federal Reserve’s 22 primary dealers. Ten-year yields touched the highest level in more than a month.

“We are seeing a selloff in Treasuries as there is some optimism that the worst-case scenario overseas might not take place, and as the market expects some sort of plan coming from the euro zone,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

Three-year note yields rose three basis points, or 0.03 percentage point, to 0.52 percent at 5:06 p.m. New York time, according to Bloomberg Bond Trader prices. They reached 0.55 percent earlier, the highest level since Aug. 1. The 0.25 percent securities due in September 2014 fell 2/32, or 63 cents per $1,000 face amount, to 99 7/32.

Benchmark 10-year yields advanced seven basis points to 2.15 percent. They touched 2.18 percent, the most since Sept. 1. Thirty-year bond yields increased eight basis points to 3.10 percent and reached 3.12 percent, the highest since Sept. 28.

Treasuries didn’t trade yesterday because of holidays in the U.S. and Japan.

‘Important Progress’

European Union and International Monetary Fund officials indicated Greece will get an 8 billion-euro ($11 billion) loan next month under a 110 billion-euro bailout, as European leaders move to reopen talks on a new package that may mean deeper writedowns on Greek debt.

A team of inspectors from the EU, IMF and European Central Bank said Greece has made “important progress” in fiscal consolidation.

With European leaders due to meet on Oct. 23 to tackle the debt crisis, Greek Finance Minister Evangelos Venizelos said the nation will meet commitments to international creditors to deepen pension and wage cuts, promising parliamentary approval for the draft 2012 budget. European Commission President Jose Barroso pledged to present proposals tomorrow on the recapitalization of European banks for discussion at the summit.

‘Something Positive’

“I don’t know anyone who is convinced things are better, but we are at a point where the mood is people feeling more confident that something positive will come out of Europe,” said James Caron, head of U.S. interest-rate strategy in New York at the primary dealer Morgan Stanley. “Europe is the thing driving the train, and we’ve had a significant turnaround in sentiment which has weighed on Treasuries.”

Lawmakers in Slovakia will reconsider an expansion of Europe’s bailout fund. The country is the only one in the 17- nation euro region that hasn’t ratified the measure, which failed to win approval in a vote today. The government fell.

Smer, largest opposition party, which didn’t back the move today, will support it in a second vote, ensuring it will pass, party leader Robert Fico told reporters in the capital Bratislava. While no date has been set for a new vote, Finance Minister Ivan Miklos said the revamped European Financial Stability Facility will likely be passed this week.

Treasury Offering

At today’s Treasury auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.30, compared with 3.15 at the September auction of the securities and an average of 3.17 for the past 10 offerings.

Indirect bidders, an investor class that includes foreign central banks, purchased 37.8 percent of the notes, versus 35.7 percent at the September auction and an average of 35.8 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 7.8 percent of the notes, the lowest level since December 2009.

The previous auction of Treasury three-year notes, on Sept. 12, drew a record low yield of 0.334 percent.

The Fed bought $2.502 billion of Treasuries under its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs and counter recession risks. The securities purchased today mature from February 2036 to May 2041. The central bank will sell $8 billion to $9 billion tomorrow of notes due from March to October 2013.

Not Much Interest

“There just didn’t seem to be all that much interest in this afternoon’s auction,” said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. “People are concerned about Fed sales at the short end. People are still slow in getting back from the extended weekend.”

The Treasury is due to sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on Oct. 13.

Treasuries have returned 8.2 percent this year, according to indexes developed by Bank of America Merrill Lynch, partly on concern that the U.S. will slip into another recession and as the European debt crisis fueled demand for safety. German bonds, regarded as the safest government securities in Europe, have risen 6.7 percent since Dec. 31, the indexes show.

--With assistance from Liz Capo McCormick in New York. Editors: Greg Storey, 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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