Bloomberg News

Treasuries Drop on Outlook for Europe; Yield at Six-Week High

October 16, 2011

Oct. 17 (Bloomberg) -- Treasuries fell, pushing yields to a six-week high, as European leaders work on a deadline to produce a plan to end the region’s sovereign debt crisis.

Treasuries have handed investors a 1.2 percent loss this month, Bank of America Merrill Lynch data show, as European officials try to revive demand for the region’s bonds, curtailing investor appetite for the relative safety of U.S. government debt. The Federal Reserve is scheduled to sell $1 billion to $1.5 billion of Treasury Inflation Protected Securities due from April 2012 to July 2014 today as part of its plan to keep down borrowing costs by swapping its holdings of shorter maturities for longer ones.

“We’re quite negative on Treasuries because we see risk appetite improving,” said Adam Donaldson, head of debt research at Commonwealth Bank of Australia in Sydney. There is “confidence and hope that global growth is being supported by the European action.”

Benchmark 10-year yields climbed two basis points, or 0.02 percentage point, to 2.27 percent as of 10:53 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2.125 percent security due in August 2021 fell 5/32, or $1.56 per $1,000 face amount, to 98 3/4. The rate is the highest since Sept. 1.

The MSCI Asia Pacific Index of shares advanced 1.7 percent, the most in almost a week, helping curb demand for debt.

Japan’s 10-year yields rose one basis point to 1.025 percent, set for the highest close in two weeks.

Central Banks Selling

Group of 20 finance ministers and central bankers concluded weekend talks in Paris by endorsing parts of a plan to avoid a Greek default, bolster European banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for the program to be delivered.

International central banks are selling the most Treasuries since the credit crisis began just as institutional investors load up on U.S. government bonds.

The Fed said its holdings of U.S. government debt on behalf of central banks and institutional investors outside America has plunged $76.5 billion in the last seven weeks, the most since August 2007. At the same time, bond mutual funds are adding Treasuries, banks have increased their holdings 45 percent in the past five years and the Fed has added $656 billion to its balance sheet this year.

Currency Support

Rather than a referendum on the U.S.’s $1.3 trillion budget deficit and rising debt burden, sales by foreign policy makers may have more to do with supporting their currencies after the Brazilian real weakened 9.8 percent and Taiwan’s dollar lost 4.9 percent against the U.S. dollar since June. With economists forecasting inflation slowing to 2.1 percent in 2012 from 3.1 percent this year and the Fed’s commitment to keeping interest rates near zero, investors say the demand that pushed government bond yields to record lows last month will be sustained.

“Demand will come from banks, insurance companies and from pension funds which are still massively underexposed to Treasuries,” Stuart Thomson, a fixed-income fund manager in Glasgow at Ignis Asset Management, which oversees 75 billion pounds ($118.5 billion), said in an Oct. 12 telephone interview.

The 10-year yield will be at 2.15 percent by Dec. 31 and 2.88 percent at the close of 2012, according to a Bloomberg survey of banks and securities companies in which the most recent forecasts are given the heaviest weightings.

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. 14 from the week before, according to the responses. A figure less than 50 shows investors expect prices to fall.

--Editors: Jonathan Annells, Benjamin Purvis

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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