Bloomberg News

Treasuries Fall Before Sales Amid Bets U.S. Can Avoid Recession

October 11, 2011

Oct. 11 (Bloomberg) -- Treasuries fell for a fifth day as the U.S. prepared to sell securities before reports this week that economists said will bolster optimism that the U.S. can avoid a recession.

Three-year notes slid before an auction of $32 billion of the debt today. The Treasury is due to offer 10-year securities tomorrow and 30-year bonds on Oct. 13. U.S. retail sales rose 0.7 percent in September, the most in six months, according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the data on Oct. 14. The Labor Department is to publish the latest jobless claims numbers on Oct. 13.

“The data has been better than expected, and some of the negative pricing action for the general economic scenario is being scaled back somewhat,” said Rasmus Rousing, a fixed- income strategist at Credit Suisse Group AG in Zurich. “What’s also important this week is that we have some supply.”

Benchmark 10-year yields rose four basis points, or 0.05 percentage point, to 2.12 percent at 6:46 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.125 percent security due August 2021 fell 3/8, or $3.75 per $1,000 face amount, to 100 1/32. The yield climbed to 2.18 percent earlier, the highest since Sept. 1. The three-year yield was little changed at 0.51 percent.

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

Retail Sales

The Federal Reserve is scheduled to buy $2.25 billion to $2.75 billion of Treasuries due between 2036 and 2041 today, according to its website. The purchases are part of the central bank’s plan to support the economy by keeping long-term borrowing costs down and safeguard the economic recovery.

“The U.S. economy is not that weak,” said Kei Katayama, who helps oversee the equivalent of $64.7 billion as leader of the foreign fixed-income group at Daiwa SB Investments Ltd. in Tokyo. European officials are “trying to solve the problem. Yields will rise,” he said.

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.

Summit Postponed

European leaders postponed a debt-crisis summit amid opposition to Germany’s drive for deeper-than-planned Greek bond writedowns that Luxembourg’s Jean-Claude Juncker says may exceed 60 percent. When asked on Austrian television late yesterday to comment on speculation investors may lose between 50 percent and 60 percent of the value of their holdings, Luxembourg’s prime minister said “we’re talking about even more.” He didn’t comment further. The Oct. 18 meeting was postponed to Oct. 23.

Guy Schuller, a spokesman for the Luxembourg government, said Juncker didn’t mean to signal bondholder losses could exceed 60 percent. He meant instead they could be higher than the 21 percent already agreed to in July, he said in a telephone interview.

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

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.

Recession Indicator

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 U.S. 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.

Money managers are bearish on Treasuries, according to a survey by Ried Thunberg ICAP Inc., a New Jersey-based unit of the world’s largest interdealer broker.

The company’s gauge on the outlook for U.S. debt through Dec. 31 held at 47 in the seven days ended Oct. 7 from the week before, according to the responses. A figure less than 50 shows investors expect prices to fall.

The previous auction, on Sept. 12, of the securities being sold today 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 sales. Indirect bidders, which include foreign central banks, bought 35.7 percent of the securities, versus the 10-auction average of 35.8.

--With assistance from Liz Capo McCormick in New York. Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Wes Goodman in Singapore at

To contact the editor responsible for this story: Daniel Tilles at

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