Bloomberg News

Treasuries Tumble as European Leaders Reach Agreement on Banks

October 26, 2011

Oct. 26 (Bloomberg) -- Treasuries fell, pushing 30-year yields up the most in two weeks, as European leaders agreed on a plan to recapitalize the region’s banks as part of an effort to tame the debt crisis, damping demand for bonds as a refuge.

U.S. government securities headed for their biggest monthly loss this year. Reports today on the U.S. economy were stronger than forecast. Treasuries pared losses earlier after the government auctioned $35 billion of five-year securities to stronger-than-average demand.

The agreement on bank recapitalization “puts more pressure on Treasuries because that was one of the biggest stumbling blocks,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “If you think the plan the Europeans put forward can limit the contagion, then you should be slamming the bond market. Stocks are gaining momentum.”

Thirty-year bond yields climbed as much as 10 basis points, or 0.10 percentage point, the biggest intraday jump since Oct. 12, to 3.23 percent. They traded at 3.22 percent at 5:03 p.m. New York time, up nine basis points, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 dropped 1 27/32, or $18.44 per $1,000 face amount, to 110 3/32.

Benchmark 10-year Treasury yields increased 10 basis points to 2.20 percent, and current U.S. five-year note yields advanced eight basis points to 1.06 percent.

October Loss

Treasuries have lost 0.6 percent in October, which would be the biggest monthly decline this year, according to a Bank of America Merrill Lynch index. They returned 6.4 percent in the third quarter, the most since the fourth quarter of 2008, as investors sought refuge amid Europe’s debt crisis and speculation the U.S. economy was weakening.

European Union leaders released a statement on the bank- recapitalization agreement after a meeting ended in Brussels. The Standard & Poor’s 500 Index rose 1.1 percent.

Today’s summit capped six days of haggling among finance ministers, central and commercial bankers, chancellors and prime ministers over the shape of Greece’s second bailout, the recapitalization of banks and the retooling of the European Financial Stability Facility, the region’s rescue fund.

French President Nicolas Sarkozy and German Chancellor Angela Merkel want to meet Greek creditors in Brussels on the sidelines of the summit to break a deadlock of the terms of a debt writedown, said a person familiar with the matter.

Deals on recapitalizing banks and bolstering the 440 billion-euro ($612 billion) rescue fund hinge on steering debt- laden Greece back toward financial health.

China Contribution

Sarkozy plans to call Chinese President Hu Jintao tomorrow to discuss China contributing to a planned euro-area investment vehicle, a person familiar with the matter said. The fund is one of the options being considered by European leaders to help bolster efforts to end the debt crisis.

Today’s auction of five-year notes drew a yield of 1.055 percent, compared with the average forecast of 1.082 percent in a Bloomberg News survey of nine of the Federal Reserve’s 22 primary dealers and a record low 1.015 percent at the last sale.

The offering attracted $2.90 in bids for each dollar of debt sold, as the halting pace of progress in the European talks led investors to seek the debt at yields just above the auction record. The average at the past 10 sales was $2.80.

Auction ‘Very Strong’

The sale was “very strong, especially given all the uncertainty in Europe,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, which as a primary dealer is obligated to bid in Treasury auctions. “It shows macro trends are still supportive for Treasuries, on a fundamental level anyway. We are of course subject to headlines, but that’s a different story.”

The auction was the second of three note offerings this week totaling $99 billion. Yesterday’s $35 billion sale of two- year notes produced higher-than-average demand and the most buying by indirect bidders in a year. The U.S. will offer $29 billion of seven-year securities tomorrow.

The Fed sold $8.87 billion of Treasuries today due from March to September 2014 as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

“This week is a little difficult with all the supply that’s hitting the market,” said Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, a primary dealer. “You have to balance the near-term dynamics in rates from the overseas events with the supply in Treasuries.”

Durable Goods

Demand for U.S. durable goods, excluding airplanes and automobiles, increased 1.7 percent in September, beating the forecast in a Bloomberg News survey that called for a 0.4 percent increase, Commerce Department data showed.

Purchases of new U.S. houses also rose more than forecast last month. Sales climbed 5.7 percent to a 313,000 annual pace, Commerce Department figures showed. The median estimate in a Bloomberg survey called for a 1.7 percent gain to 300,000.

The U.S. economy grew at an annual pace of 2.5 percent in the third quarter, the fastest in a year, economists in a Bloomberg survey forecast before the government reports the data tomorrow. Gross domestic product accelerated at a 1.3 percent pace in the second quarter and 0.4 percent in the first.

--With Helene Fouquet in Paris and Jim Brunsden in Brussels. Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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


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