Bloomberg News

Treasuries Fall Before Debt Auctions as Europe Pessimism Eases

October 11, 2011

Oct. 11 (Bloomberg) -- Treasuries fell, pushing 10-year yields to a one-month high, as the U.S. prepared to sell $66 billion in notes and bonds and pessimism eased that Europe’s leaders won’t be able to contain the region’s debt crisis.

Three-year securities slid before an auction of $32 billion of the debt today. The Treasury is due to offer 10-year notes tomorrow and 30-year bonds on Oct. 13. A team of international inspectors said Greece has made overall progress in fiscal consolidation and is likely to receive its next payment of rescue funds in early November, damping demand for refuge.

“People are feeling less pessimistic, as there seems to be some traction in Europe, which is still in driver’s seat, so Treasuries are weaker,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 22 primary dealers that trades directly with the Federal Reserve. “There is less eagerness to buy the long end ahead of the Treasury auction as well.”

Benchmark 10-year yields climbed seven basis points, or 0.07 percentage point, to 2.15 percent at 11:20 a.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.18 percent, the highest level since Sept. 1. The 2.125 percent security due August 2021 dropped 5/8, or $6.25 per $1,000 face amount, to 99 25/32.

The three-year yield rose three basis points to 0.52 percent and touched 0.55 percent, the highest since Aug. 1.

Treasuries didn’t trade yesterday due to holidays in the U.S. and Japan.

Fed Purchase

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 global markets’ eerie doom-and-gloom feel has made quite a reversal, with the risk-on trade back as investors are much more confident that European officials are acknowledging and looking to stem the debt crisis,” said Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald LP in New York. “We do not believe there will be many issues underwriting the auction today and expect results to be fair.”

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.

‘Market-Nudging’

“The auctions should go well, but it might take a little ’market-nudging’ in the form of higher rates to get investors off the bench and into the game,” wrote Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, in a note to clients.

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

Investors bid for 3.15 times the amount of available debt last month, versus the average of 3.17 for the past 10 offerings. Indirect bidders, a category that includes foreign central banks, bought 35.7 percent of the securities, versus the 10-auction average of 35.8.

Inspectors from the European Union, International Monetary Fund and European Central Bank indicated Greece will get an 8 billion-euro ($11 billion) loan next month under a 110 billion- euro bailout. They said Greece has made “important progress” in fiscal consolidation.

Slovakian Vote

Slovakia may approve the euro region’s retooled bailout fund after a political storm that’s likely to topple Prime Minister Iveta Radicova’s ruling coalition. The country is the only one in the 17-nation euro area that hasn’t ratified the measure.

The largest opposition party, which said it won’t back the motion today, will support the revamped European Financial Stability Facility in a second vote, should the first try fail and bring down the government, Robert Fico, the group’s leader, told reporters in the capital Bratislava. That would give the measure a majority. There is no date set for a repeat vote.

In postponing a summit of euro leaders by five days yesterday to Oct. 23, European Union President Herman Van Rompuy sought extra time to pursue a “comprehensive” package including a solution for Greece, aid for banks and a further strengthening of the rescue fund.

The debt crisis in Europe has reached a “systemic dimension,” ECB President Jean-Claude Trichet told European lawmakers in Brussels today.

Losses by Treasuries may be limited as there’s still a chance U.S. gross domestic product will contract, judging by the country’s government bond yields.

Recession Indicator

The bond-market indicator that has predicted every American recession since 1970 shows that the economy has about a 60 percent chance of shrinking within 12 months.

The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points less than five-year notes, according to Bank of America Corp. research. The unadjusted gap of 79 basis points at the end of last week indicates the chance of recession at about 15 percent.

Short-term rates have been higher than longer-term yields, or inverted, before each of the seven recessions since 1970. A contraction would make it harder for President Barack Obama to reduce unemployment, which has held at or above 9 percent every month except two since May 2009, including a reading of 9.1 percent in September. It may also help bolster Treasuries and keep yields near all-time lows.

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

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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