Bloomberg News

Treasuries Rise Before European Summit, End Three-Day Decline

October 25, 2011

Oct. 25 (Bloomberg) -- Treasury 10-year bonds rose, snapping a three-day decline, as European leaders prepare to meet for the second time in four days tomorrow in a bid to solve the euro area’s sovereign debt crisis.

The yield on benchmark 10-year notes retreated from near the highest level in a week as a European Union document showed that boosting the effectiveness of the region’s bailout fund will require further talks with investors. Longer-maturity debt led gains before the Federal Reserve is scheduled to purchase as much as $5 billion of Treasuries today as part of a plan to stimulate economic growth through lower borrowing costs.

“Our bias remains negative with some of the European policy responses still looking clearly inadequate,” said Skye Masters, a rates strategist at Royal Bank of Scotland Group Plc in Sydney. “Technicals and market positioning look supportive for Treasuries and for yields to go lower. We would still be looking for opportunities to add to longs rather than go short.” A long position is a bet an asset will rise in value.

Ten-year Treasury yields fell two basis points, or 0.02 percentage point, to 2.22 percent as of 6:50 a.m. in London, according to Bloomberg Bond Trader prices. The rate yesterday climbed as high as 2.24 percent, the most since Oct. 17. The 2.125 percent security due August 2021 rose 5/32, or $1.56 per $1,000 face amount, to 99 6/32.

Europe’s Rescue Fund

While the European Financial Stability Facility, the EU’s rescue fund, can be bolstered under two models that may be combined and implemented “quickly,” the extent to which the fund is leveraged can only be ascertained after discussions with investors and rating companies, the document provided to German lawmakers said.

EU leaders are seeking an agreement on bolstering the fund, recapitalizing banks and providing debt relief to Greece to avoid contagion spreading to Italy and Spain.

The draft document underscores the gaps remaining in efforts to address the crisis as German Chancellor Angela Merkel and fellow leaders prepare to return to Brussels. Leaders are still jousting with banks over the size of losses they take on Greek bonds while deliberating over leveraging the fund after ruling out tapping the European Central Bank’s balance sheet.

The euro halted five days of gains, falling 0.2 percent to $1.3906 from yesterday in New York.

Japan’s 10-year bonds snapped a two-day decline and yielded 1.02 percent, unchanged from yesterday.

Borrowing Costs

The difference in yields between short- and long-maturity debt narrowed for the first time in four days before the Fed plans to purchase from $4.25 billion to $5 billion of Treasuries maturing from October 2017 to August 2019 today, according to its website.

The central bank will sell up to $9 billion of Treasuries due in 2014 on Oct. 26 and will also offer up to $9 billion in notes maturing in 2013 and 2014 in an operation on Oct. 28.

The yield spread between two- and 10-year notes contracted to 193.5 basis points after touching 202.2 basis points on Oct. 17, the most since Sept. 1.

Yields on 30-year bonds fell two basis points to 3.25 percent. The 3.75 percent security due August 2041 gained 13/32, or $4.06 per $1,000 face amount, to 109 15/32.

Federal Reserve Bank of New York President William C. Dudley said yesterday the central bank wants to keep mortgage rates from rising too much and may do more to hold down borrowing costs. The Fed’s decision last month to reinvest proceeds from maturing housing debt into mortgage-backed securities was a “signal that we do have concern about the level of mortgage spreads,” Dudley said.

Policy makers approved the action as part of an effort to spur the economy with lower borrowing costs by replacing $400 billion of short-term Treasuries in the Fed’s portfolio with longer-term bonds.

Treasury Sales

Bond gains were limited before the Treasury sells $35 billion of two-year debt, the same amount of five-year notes and $29 billion of seven-year securities in three daily sales starting today.

The two-year notes scheduled for sale today yielded 0.3 percent in pre-auction trading, rising from 0.25 percent at the previous auction of the securities on Sept. 27. Investors bid for 3.76 times the amount of available debt last month, compared with the average of 3.33 for the past 10 auctions.

U.S. government debt is headed for its first monthly drop since June amid signs that the U.S. economic recovering is being sustained. It has lost 1.2 percent in October, according to Bank of America Merrill Lynch indexes.

The Conference Board’s consumer confidence gauge climbed in October for a second month, rising to 46 from 45.4, according to the median projection in a Bloomberg survey before the New York group’s report today. Gross domestic product expanded an annualized 2.5 percent in the third quarter, according to economist estimates before an Oct. 27 report, after growing 1.3 percent in the previous period.

Dan Fuss, vice chairman of Loomis Sayles & Co., said in Taipei today that he is “more optimistic than others,” on the U.S. economy. Fuss, whose Loomis Sayles Bond Fund beat 84 percent of its peers in the past one month, said he will stay away from Treasuries and has instead bought corporate bonds.

--Editors: Jonathan Annells, Naoto Hosoda

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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


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