Bloomberg News

Treasuries Climb on Europe; 10-Year Yields Drop From 7-Week High

October 17, 2011

Oct. 17 (Bloomberg) -- Treasuries gained, pushing 10-year yields down from the highest level in seven weeks, as concern Europe may take longer to contain its sovereign debt turmoil boosted demand for the safest assets.

Thirty-year bonds erased a drop after German Chancellor Angela Merkel’s chief spokesman said “dreams” of an imminent resolution to the crisis aren’t likely to be fulfilled at an Oct. 23 summit. Manufacturing in New York, northern New Jersey and southern Connecticut contracted faster than forecast, the Empire State Index showed.

“The market will stay very schizophrenic until there is a real concrete plan in hand in Europe,” said Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York. “The negative risk sentiment tied to Europe is dominating everything and driving Treasuries higher. Expectations of a resolution have been far overblown.”

Yields on 10-year notes tumbled nine basis points, or 0.09 percentage point, to 2.16 percent at 5:06 p.m. New York time, according to Bloomberg Bond Trader prices. The yields earlier rose to 2.29 percent, the highest level since Aug. 29. The price of the 2.125 percent securities due in August 2021 increased 26/32, or $8.13 per $1,000 face amount, to 99 23/32.

Thirty-year bond yields slid 10 basis points to 3.13 percent after rising earlier to 3.29 percent, the highest level since Sept. 16.

European Bonds Gain

European government bonds also gained, pushing yields down. Yields on Germany’s 10-year securities dropped 10 basis points, the most this month, to 2.10 percent after earlier rising to 2.25 percent. The U.K.’s 10-year note yields fell eight basis points to 2.53 percent.

Stocks and the euro tumbled. The Standard & Poor’s 500 Index dropped 1.9 percent. The euro weakened 1 percent to $1.3738.

The Fed Bank of New York’s general economic index was at minus 8.5 this month, compared with minus 8.8 in September. Economists projected an improvement to minus 4, based on the median of 53 forecasts in a Bloomberg News survey. Readings less than zero signal companies in the Empire State Index, covering New York, northern New Jersey, and southern Connecticut, are cutting back.

Industrial production in the U.S. increased 0.2 percent, in line with the median estimate in a Bloomberg News survey, after being little changed in August, Fed data showed.

‘Muddle Along’

“The data we’ve seen over the last two weeks or so has provided some encouragement that the economy is not heading into a recession, but it’s still obvious that the data doesn’t show great strength either, so we will continue to muddle along,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 22 primary dealers that trade with the U.S. central bank.

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

Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

“The market is going to make them prove that they can implement the plan,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

Monthly Drop

Treasuries were headed for the biggest monthly decline since December 2010, losing 1.2 percent in October, compared with a 0.8 percent drop in an index of global sovereign securities, Bank of America Merrill Lynch data show.

The difference between U.S. two- and 10-year note yields widened earlier to 2.02 percentage points, the most since Sept. 1, before dropping to 1.89 percentage points. The gap touched a 2011 low of 1.48 percentage points on Oct. 4 and a high of 2.93 on Feb. 7.

Treasuries due in six to 11 years may outperform in a rally as primary dealers already own large amounts of longer-maturity bonds, according to the primary dealer BNP Paribas SA.

Primary dealers held $14.3 billion of U.S. debt on Oct. 5 maturing in more than 11 years, according to data from the New York Fed. That’s the most since May 20, 2009. Holdings of debt due between six and 11 years were $879 million on Oct. 5.

Fed Sale

The Fed sold $1.37 billion in Treasury Inflation Protected Securities today as part of the plan to lower borrowing costs that’s become known as Operation Twist. Under the program, the central bank is selling holdings of shorter-term maturities in its portfolio for longer-term ones. The debt sold today was due from July 2013 to July 2014, the New York Fed’s website showed.

The central bank will buy $2.25 billion to $2.75 billion tomorrow of Treasuries due from February 2036 to August 2041.

The yield gap between two-year Treasury index-linked bonds and nominal securities, a gauge known as the break-even rate of trader expectations for inflation over the term of the securities, widened to 127 basis points from this year’s low of 81 basis points on Aug. 18. The 10-year rate expanded to 205 basis points on Oct. 11, the most since Sept. 6, and was at 195 basis points today.

--With assistance from Paul Dobson in London and Daniel Kruger in New York. Editors: Greg Storey, Dennis Fitzgerald

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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