Bloomberg News

Treasury 30-Year Bonds Fall Amid Optimism on European Crisis

October 21, 2011

Oct. 21 (Bloomberg) -- Treasury 30-year bonds fell for a fourth day as optimism that European leaders will move closer to a resolution of the region’s sovereign debt crisis sapped demand for the safety of U.S. government securities.

The long bond’s yield touched the highest since Oct. 17 as European leaders began a six-day battle over how to save Greece from default, shield banks from the fallout and build more powerful defenses against the crisis. Stocks climbed. Federal Reserve Vice Chairman Janet Yellen said a third round of large- scale asset purchases by the central bank may become necessary.

“We’ve seen the market under pressure as there’s a new round of enthusiasm that Europe will get their act together,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade Treasuries with the Federal Reserve. “To the extent that something credible comes out of Europe, the long end is where the selling is going to be.”

Thirty-year yields climbed five basis points, or 0.05 percentage point, to 3.26 percent at 5:17 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 3.28 percent and fell to as low as 3.19 percent. The price of the 3.75 percent securities maturing in August 2041 slid 31/32, or $9.69 per $1,000 face amount, to 109 7/32.

Yields on 10-year notes rose three basis points to 2.22 percent after rising earlier to 2.24 percent and falling to 2.16 percent. They decreased three basis points this week in their first five-day loss since Sept. 23, the day they dropped to a record low 1.6714 percent.

The Standard & Poor’s 500 Index climbed 1.9 percent as investors sought higher-yielding assets.

Yield Premium

The extra yield investors get to buy 30-year bonds instead of two-year notes widened to as much as 3 percentage points, the most compared with closing levels since Sept. 20.

Yellen said another round of bond purchases under quantitative easing might become warranted if needed to boost a U.S. economy challenged by unemployment above 9 percent and financial turmoil.

“Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation,” Yellen said today in a speech in Denver.

The central bank already purchased $2.3 trillion in debt in two rounds of quantitative easing to spur the economy. In August, it pledged to hold interest rates near zero until at least mid-2013, and last month it said it would swap $400 billion of short-term debt in its portfolio for longer-term securities to bring down interest rates. Economists dubbed the strategy Operation Twist after a similar program in the 1960s.

Mortgage Bonds

Fed Governor Daniel Tarullo yesterday called in a speech in New York for resuming large-scale purchases of mortgage bonds.

The Fed bought $4.6 billion of Treasuries today due from November 2019 to August 2021 under Operation Twist.

Dallas Fed President Richard Fisher said the program is benefiting financiers and not aiding job creation. It has “so far been of greater benefit to traders and large monied interests than to job-creating businesses,” Fisher said today in a speech in Dallas.

The Treasury will auction $99 billion of notes in three sales next week: $35 billion of two-year securities, an equal amount in five-year debt and $29 billion in seven-year notes. It sold the same amounts of the maturities last month.

Two Summits

Euro region finance ministers met today, followed by ministers from all 27 European Union countries tomorrow. EU and euro-area leaders gather on Oct. 23, with a second summit scheduled for Oct. 26.

European governments may deploy as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, seeking to break a deadlock between Germany and France that is forcing leaders to hold two summits within four days.

Talks on combining the EU’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked the French-German clash, two people familiar with the discussions said. They declined to be identified because political leaders will have to decide.

Treasuries have lost 0.9 percent in October in what would be their biggest monthly drop this year, Bank of America Merrill Lynch data show. Their return of 6.4 percent in the third quarter was the biggest since the fourth quarter of 2008.

--With assistance from James G. Neuger and Stephanie Bodoni in Brussels. Editors: Greg Storey, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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