Bloomberg News

Treasury 10-Year Notes Gain First Time in Month Before Summits

October 22, 2011

Oct. 22 (Bloomberg) -- Treasury 10-year notes gained for the first time in a month as concern European leaders may not reach agreement on containing the region’s sovereign debt crisis spurred demand for the safety of U.S. government securities.

Yields on 30-year bonds climbed for a fourth consecutive week, the longest losing streak this year, as reports showing inflation increased last month eased optimism about the Federal Reserve’s purchase of longer-maturity debt. European finance ministers began a six-day negotiation yesterday aimed at preventing a Greek default and shielding banks.

“We’ve gone from headline to headline in Europe,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., said yesterday. “It’s not a situation where people want to commit a lot of capital. It’s been utterly ridiculous the irresponsible speculation coming out of Europe. We’ll see what happens this weekend and on Wednesday.”

Benchmark 10-year note yields fell three basis points, or 0.03 percentage point to 2.22 percent yesterday, from 2.25 percent on Oct. 14, according to Bloomberg Bond Trader prices. It was their first weekly decrease since Sept. 23, the day they dropped to a record low 1.6714 percent. The price of the 2.125 percent securities due in August 2021 gained 1/4, or $2.50 per $1,000 face amount, to 99 5/32.

Thirty-year yields fell three basis points to 3.26 percent.

Ten-year yields traded between 2.08 percent and 2.29 percent this week, increasing on three days and falling on two, as European leaders prepared for meetings on the two-year-old debt crisis amid a split between France and Germany.

Two Summits

Euro region finance ministers met yesterday, and ministers from all 27 European Union countries meet today. EU and euro- area leaders gather for a summit tomorrow, with another scheduled for Oct. 26. Aid packages of 256 billion euros ($354 billion) for Greece, Ireland and Portugal have failed to stabilize markets or keep the turmoil from spreading.

European governments may deploy as much as 940 billion euros to fight the debt crisis.

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.

Lower Volume

U.S. debt fluctuated this week amid lower-than-average volume. About $222 billion of Treasuries on average was traded each day, compared with a $300 billion daily average in 2011, according to Icap Plc, the world’s largest interdealer broker. About $171 billion changed hands on Oct. 17, the least since Aug. 29, Icap data showed.

“It’s been trading on headlines coming out of Europe, and there’s been lots of confusion as to what any given headline means,” Thomas Simons, a government debt economist in New York at Jefferies Group Inc., said Oct. 20. “It’s a bizarre situation.” Jefferies is one of 22 primary dealers that trade with the Federal Reserve.

The Treasury will sell $99 billion of notes next week in three daily sales starting Oct. 25: $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.

An auction on Oct. 20 of 30-year inflation-indexed bonds drew a record low yield of 0.999 percent. The average forecast in a Bloomberg News survey of eight primary dealers was for a yield of 1.038 percent.

Stronger Data

Treasuries also fluctuated this week amid stronger-than- forecast economic data. Wholesale prices rose 0.8 percent last month, four times the forecast in a Bloomberg survey, Labor Department data showed on Oct. 18. Housing starts climbed 15 percent to 658,000 houses at an annual rate, the most since April 2010, the Commerce Department reported Oct. 19. The median forecast called for a 590,000 pace. The consumer price index gained 0.3 percent in September from August, data showed.

The U.S. economy accelerated at an annualized pace of 2.5 percent in the third quarter, the fastest since the three months ended Sept. 30, 2010, economists in a Bloomberg News survey forecast before government data due Oct. 27.

The Fed purchased $11.98 billion of Treasuries this week as part of its program to swap shorter-maturity holdings for longer-term ones in a bid keep borrowing costs down. It sold $10.24 billion of debt and inflation-linked securities. The Fed announced the program, known as Operation Twist, last month.

Previously it bought $2.3 trillion of assets under two rounds of a monetary-stimulus tactic called quantitative easing.

Third Round

Fed Vice Chairman Janet Yellen said yesterday a third round of large-scale securities purchases might become warranted if needed to boost an economy challenged by unemployment over 9.1 percent and financial turmoil. She spoke at an event in Denver.

Dallas Fed President Richard Fisher said earlier yesterday in a speech in Dallas the program is benefiting financiers and not aiding job creation.

Treasuries have lost 1.1 percent in October in what would be their biggest monthly drop this year, Bank of America Merrill Lynch index data show. Their return of 6.4 percent in the third quarter was the biggest since the fourth quarter of 2008.

“If Europe gets its act together, you would assume that there would be an exodus out of dollar products and back into Europe because it’s been so beaten,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York.

--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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