Bloomberg News

Treasury 10-Year Yields Reach Two-Month High on European Accord

October 27, 2011

Oct. 27 (Bloomberg) -- Treasuries fell for a second day, pushing 10-year yields to the highest level in more than two months, as European leaders’ plan to contain their sovereign debt crisis fueled appetite for higher-yielding assets.

Thirty-year yields reached the highest in six weeks as the U.S. economy grew in the third quarter at its fastest in a year. Government bonds slid from Japan to Britain as stocks surged on speculation an expanded European bailout plan and an accord with lenders on Greek debt writedowns will avert a global slowdown. The U.S. will sell $29 billion of seven-year notes today.

“To the extent that policy makers can cauterize the flow of bad news out of Europe, risk assets will benefit,” Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, said via e-mail. “There is a vast pool of cash which could flood into risk assets before year-end if investors could be convinced the European situation won’t spiral into disarray.” The firm is one of the 22 primary dealers that trade with the Federal Reserve.

Benchmark 10-year yields climbed 10 basis points, or 0.10 percentage point, to 2.30 percent at 11:27 a.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.32 percent, the highest since Aug. 12. The 2.125 percent securities due in August 2021 dropped 27/32, or $8.44 per $1,000 face amount, to 98 15/32.

The 30-year yield increased 11 basis points to 3.33 percent. It reached 3.35 percent, the most since Sept. 16.

U.S. Economy

U.S. gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, matching the median forecast of economists surveyed by Bloomberg News and up from a 1.3 percent gain in the second quarter, Commerce Department data showed. Household purchases, the biggest part of the economy, gained at a more-than-projected 2.4 percent pace.

“Three weeks ago, we were priced for the market to fall into a recession pretty quickly,” said Michael Pond, co-head of interest-rate strategy in New York at the primary dealer Barclays Plc. “The data’s not consistent at all with that, and that’s why we’ve had the run-up in yields.”

First-time jobless claims fell by 2,000 to 402,000 in the week ended Oct. 22, a report today by the Labor Department showed. The median forecast of economists in a Bloomberg News survey called for a drop to 401,000.

Second Summit

European leaders at their second crisis summit in four days persuaded bondholders to take a 50 percent loss on Greek securities and boosted Europe’s rescue fund to 1 trillion euros ($1.4 trillion). Lawmakers also got signals that Italy will do more to cut its debt, the European Central Bank will maintain bond purchases and the International Monetary Fund may take on a bigger role in resolving the debt crisis.

The MSCI World Index of shares climbed 3.5 percent and the Standard & Poor’s 500 Index gained 2.2 percent, helping damp demand for debt. The euro strengthened 1.9 percent to $1.4167.

German bund yields climbed 17 basis points to 2.21 percent and touched 2.22 percent, the highest since Oct. 17, and 10-year U.K. yields increased 14 basis points to 2.61 percent. Japan’s 10-year yield rose 1.3 basis points to 1.01 percent, while Australia’s 10-year rates jumped 12 basis points to 4.49 percent, almost a two-month high.

“It’s a step in the right direction; that’s why markets are responding,” said John Fath, a principal at the investment firm BTG Pactual in New York who manages $2.5 billion of bonds. “There’s no magic wand for this issue.”

October Loss

Treasuries have lost 1 percent in October as of yesterday, the biggest monthly drop this year, according to Bank of America Merrill Lynch indexes, as investors sought higher-yielding assets amid signs U.S. growth is gathering pace. German bunds fell 0.3 percent, while Japanese government bonds returned 0.1 percent.

Bets on inflation rose to a two-month high. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, widened to 2.14 percentage points, the most since Aug. 18.

The Fed bought $2.502 billion of Treasuries today due from February 2036 to February 2041, according to its website. The purchases are part of the central bank’s plan to keep long-term borrowing costs down by swapping shorter maturities in its holdings for longer ones.

The U.S. seven-year notes being sold today yielded 1.755 percent in pre-auction trading, versus a record low 1.496 percent at the previous sale of the securities on Sept. 29. It’s the third of three note auctions this week totaling $99 billion.

Investors bid for 3.02 times the amount of seven-year notes offered last month, compared with an average of 2.83 for the past 10 auctions.

Indirect bidders, the investor category that includes central banks outside the U.S., purchased 41.6 percent of the securities, versus the 10-sale average of 46.7 percent.

--Editors: Greg Storey, Dennis Fitzgerald

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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


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