Bloomberg News

Treasuries Rise as Stocks Drop on Split Between France, Germany

October 19, 2011

Oct. 19 (Bloomberg) -- Treasury notes rose as U.S. stocks dropped after a split emerged between France and Germany on proposals to leverage Europe’s rescue fund, stoking demand for the safety of government debt.

U.S. 30-year bonds fluctuated, falling earlier amid speculation on whether European Union leaders, who meet for a summit Oct. 23, may be nearing a resolution of the region’s debt crisis. The Federal Reserve said companies reported more doubt about the strength of the economic recovery. The U.S. will sell $7 billion tomorrow of inflation-linked bonds.

“There’s still volatility, with the market reacting to every headline with regard to the summit this weekend,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 22 primary dealers that trade Treasuries with the Fed. “Expectations have been for a positive outcome. If that’s in question, the Treasury market will rally for sure.”

Ten-year yields fell two basis points, or 0.02 percentage point, to 2.16 percent at 5:07 p.m. New York time, according to Bloomberg Bond Trader prices. They rose earlier as much as five basis points. The 2.125 percent securities maturing in August 2021 gained 1/8, or $1.25 per $1,000 face amount, to 99 22/32. Two-year note yields were unchanged at 0.27 percent.

‘Wild Animal’

The 30-year yield was little changed at 3.18 percent after falling to as low as 3.14 percent and climbing to as high as 3.23 percent.

“The bond has been a wild animal,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Co. in New York. “It’s gyrating with the global headlines, swinging back and forth. The 30-year is the most sensitive right now to the pent-up emotion in the marketplace and the potential for governmental policies.”

The yield gap between 30- and two-year Treasuries increased earlier to as wide as 2.96 percentage points, approaching the 2.97 percentage point high for the month set Oct. 14.

The Standard & Poor’s 500 Index fell 1.3 percent after earlier rising 0.4 percent.

U.S. 10-year notes erased earlier losses as Franco-German division on the role of the European Central Bank in leveraging the euro bailout fund emerged at an event in Frankfurt today to mark the conclusion of Jean-Claude Trichet’s term as the ECB’s president. Euro-area leaders assembled in Frankfurt four days before the summit to solve the region’s sovereign debt crisis.

ECB Role

The issues frustrating them include how to write down as much as 50 percent on Greek bonds, setting up a backstop for banks and finding a continued central bank role. French Finance Minister Francois Baroin disclosed to reporters the depth of the disagreement on the ECB, which along with Germany has rejected using its balance sheet to bolster the 440 billion-euro ($607 billion) European Financial Stability Facility.

While Germany endorsed enabling the EFSF to insure a portion of cash-strapped nations’ bond sales, Baroin said France wanted to turn it into a bank that could tap the ECB.

The Fed said in its Beige Book regional economic survey consumer spending rose slightly last month and the U.S. economy maintained its expansion.

Conditions in the labor market were “little changed, on balance, in September” and several Fed districts saw “only limited and selective demand for new hires,” the central bank said. The Boston, Richmond, Atlanta, and Chicago districts said further hiring was “being restrained by elevated uncertainty or lower expectations for their future growth.”

Fed Purchase

The Fed purchased $4.88 billion of Treasuries maturing from October 2017 to August 2019 today as part of its effort to lower borrowing costs.

The central bank said on Sept. 21 it would buy $400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities in its portfolio due in three years or less. The program is known as Operation Twist.

The U.S. will auction $7 billion in 30-year Treasury Inflation Protected Securities tomorrow. The last sale of the securities, a $7 billion offering on June 23, drew a record low yield of 1.744 percent.

Treasuries fell earlier as data showed builders began work on more U.S. homes than forecast in September, starting 658,000 houses at an annual rate, Commerce Department data showed. That was up 15 percent from August and the most since April 2010. A Bloomberg News survey forecast a 590,000 pace.

Ten-year notes yielded negative 1.71 percentage points after subtracting the rate of consumer-price increases in the U.S. The figure, called the real yield, was negative 2.05 percentage points on Sept. 22.

‘Back-Burner Concern’

The consumer price index rose 0.3 percent from the prior month, in line with the median projection of economists surveyed by Bloomberg News, Labor Department data showed. Excluding volatile food and fuel costs, the so-called core rose 0.1 percent, less than forecast and the smallest gain since March.

“Inflation is a back-burner concern right now,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in Fixed income assets. “The deal or no-deal developments in Europe play a much bigger role than the economic data today.”

U.S. government securities have lost 0.8 percent in October, the most since December, Bank of America Merrill Lynch data show. An index of sovereign bonds around the world dropped 0.6 percent over the same period.

--With assistance from Jeff Black in Frankfurt and Paul Dobson in London. Editors: Greg Storey, Dave Liedtka

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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