Bloomberg News

Treasury 30-Year Bonds Drop for Longest Since January on Europe

October 15, 2011

Oct. 15 (Bloomberg) -- U.S. 30-year bonds capped the longest weekly losing streak since January as concern eased that Europe is unable to curb its debt crisis and U.S. retail sales climbed, damping bets the country will fall into a recession.

Treasuries are off to the worst monthly start this year just after completing the strongest quarter since 2008 as appetite for higher-yielding assets overtook demand for a refuge that was spurred by speculation the debt crisis was worsening and the U.S. economy was floundering. Federal Reserve Chairman Ben S. Bernanke will speak next week on the effects of the last recession on central bank policy.

“Optimism in Europe and a better outlook in the U.S. have weighed on Treasuries this week,” said Michael Cloherty, head of U.S. rates strategy for fixed income and currencies in New York at Royal Bank of Canada, one of the 22 primary dealers that trade with the Fed. “You really must have a steady drumbeat of bad news to sustain lower yields, and we are not seeing that.”

Thirty-year yields rose 22 basis points, or 0.22 percentage point, to 3.23 percent yesterday in New York from a week earlier, according to Bloomberg Bond Trader prices. It was the long bonds’ third weekly loss, the longest since the three weeks ended Jan. 21. The 3.75 percent securities due in August 2041 dropped 4 15/32, or $44.69 per $1,000 face amount, to 109 7/8.

The benchmark 10-year yield increased 17 basis points to 2.25 percent as the note’s price fell for the third week in its longest losing streak since April. The yield reached 2.27 percent on Oct. 12, the most since Sept. 1.

Most This Year

Treasuries have lost 1.2 percent in October, the most in any month in 2011, according to a Bank of America Merrill Lynch index. They returned 6.4 percent from July through September, their best quarter since the depths of the financial crisis at the end of 2008.

The Fed purchased $12 billion in Treasuries this week maturing from 2017 to 2041 as part of a program known as Operation Twist to keep borrowing costs down and jumpstart the economy. The central bank is buying $400 billion of longer-term Treasuries through June and selling an equal amount of shorter- term debt in its portfolio. It sold $8.9 billion this week of Treasuries due in 2013.

Ten-year Treasury yields climbed yesterday on speculation Group of 20 finance ministers and central bankers opening a two- day meeting in Paris will agree to give the International Monetary Fund greater firepower to resolve Europe’s debt woes.

The region’s two-year sovereign debt crisis has pushed Greece to the brink of default, threatened to curb world economic growth and raised speculation the 17-nation euro won’t last in its current form, sending the yield on the U.S. 10-year note to a record low 1.67 percent on Sept. 23.

Rescue Plan

European officials yesterday were discussing a rescue plan that may include deeper investor losses on Greek bonds and higher bank capital levels.

“Europe is the thing driving the train, and we’ve had a significant turnaround in sentiment which has weighed on Treasuries,” James Caron, head of U.S. interest-rate strategy in New York at the primary dealer Morgan Stanley, said Oct. 11.

Improving domestic economic news also sapped demand for Treasuries. Retail sales increased 1.1 percent in September, the biggest jump since February and the second-biggest in almost a year, Commerce Department data showed yesterday. The median forecast in a Bloomberg News survey was for a 0.7 percent rise.

U.S. nonfarm payrolls grew more than forecast in September, government data showed last week, increasing by 103,000 jobs versus a Bloomberg survey estimated of 60,000. The unemployment rate remained at 9.1 percent.

‘Tone of Contention’

Minutes of the Federal Open Market Committee’s Sept. 20-21 meeting released Oct. 12 showed some policy makers saw “considerable uncertainty” that U.S. economic growth will pick up. Debate culminated in the decision to launch Operation Twist.

Some officials wanted to keep further asset purchases as an option to boost the economy. The Fed previously bought $2.35 trillion of assets in two rounds of quantitative easing.

“The tone of contention among Fed members is going to continue no matter what happens in the economy going forward,” Thomas Simons, a government debt economist in New York at The primary dealer Jefferies Group Inc. said Oct. 12.

Bernanke is scheduled to speak on Oct. 18 at the Boston Fed on the slump’s effect on “central bank doctrine and practice.” The Fed will release its Beige Book economic survey a day later.

Inflation Outlook

The increase in the cost of living in the U.S. slowed last month, a report on Oct. 19 is forecast to show. The consumer price index quickened 0.3 percent in September, from 0.4 percent a month earlier, economists in a Bloomberg survey forecast before the Labor Department reports the data.

The difference in yield between 10-year Treasuries and comparable inflation-indexed debt, a measure of traders’ expectations for consumer prices known as the break-even rate, widened yesterday to 1.99 percentage points, the highest since Sept. 8 after reaching 1.67 percent on Sept. 23, the least in a year. It has averaged 2.29 percent in 2011.

The U.S. sold $66 billion in notes and bonds this week. A $13 billion sale of the 30-year bond Oct. 13 drew a record low yield of 3.12 percent. The government sold $32 billion in three- year notes Oct. 11 at a yield of 0.544 percent and $21 billion in 10-year debt Oct. 12 at 2.271 percent.

The entire amount raised this week was new cash, with none of the proceeds dedicated to redeeming maturing securities, according to the Treasury Department.

The government will sell $7 billion in 30-year Treasury Inflation Protected Securities on Oct. 20.

--Editors: Greg Storey, Paul Cox

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: Robert Burgess at bburgess@bloomberg.net


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