Bloomberg News

U.S. 30-Year Yields Rise Most in 2 Months as Risk Appetite Gains

October 27, 2011

Oct. 27 (Bloomberg) -- Treasuries tumbled, pushing up 30- year bond yields the most in more than two months, as European leaders’ plan to contain their sovereign debt crisis fueled appetite for higher-yielding assets.

U.S. bonds extended their decline after an auction of $29 billion of seven-year notes drew the weakest demand in two years. Benchmark 10-year note yields touched the highest level in more than two months as stocks surged on bets the European plan will avert a global slowdown.

“It’s a huge performance-anxiety shift,” said George Goncalves, head of interest rate strategy at Nomura Holdings Inc., one of 22 primary dealers that trade with the Federal Reserve. “There’s been a fear in the market surrounding Europe. The markets are doing Operation Unwind and leaving to look for higher-yielding securities, and that will cause Treasuries to underperform.”

Thirty-year bond yields gained 24 basis points, or 0.24 percentage point, the biggest intraday jump since Aug. 11, to 3.46 percent at 5:08 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.75 percent securities maturing in August 2041 plunged 4 21/32, or $46.56 per $1,000 face amount, to 105 14/32.

Yields on benchmark 10-year notes climbed 19 basis points to 2.40 percent and touched 2.41 percent, the highest level since Aug. 9. Yields on current seven-year notes rose 16 basis points to 1.81 percent.

The Standard & Poor’s 500 Index rose 3.4 percent, extending its biggest monthly rally since 1974.

Economy Accelerates

Treasuries also dropped as the U.S. economy accelerated in the third quarter at the fastest pace in a year.

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.

“We’ve had what the market believes is a big momentum changer and a big fact changer,” said Jim Vogel, an interest- rate strategist at FTN Financial in Memphis, Tennessee. “The market seems convinced the Fed will not be as concerned and will raise rates much quicker than they thought earlier.”

Wagers on inflation increased to a two-month high. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to as much as 2.19 percentage points, the most since Aug. 16.

Buy Recommendation

Citigroup Inc. recommended that investors buy three-year Treasury notes, saying “the best news is likely behind us both from Europe and the United States.”

“The Fed is likely to remain on hold for a long time to come,” strategist Brett Rose in New York wrote in a research note today. “We think that the recent positive news is unlikely to move forward removal of Fed accommodation.”

Policy makers have kept the benchmark U.S. interest rate at zero to 0.25 percent since December 2008 to support the economy.

Today’s auction was the third of three U.S. note sales this week totaling $99 billion. Yesterday’s $35 billion offering of five-year notes drew stronger-than-average demand. The auction of the same amount of two-year notes Oct. 25 drew the most buying by indirect bidders in a year.

Lowest Since 2009

The seven-year sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 2.59, the lowest since May 2009. The average ratio at the past 10 offerings was 2.83.

“You could chalk it up to poor timing, falling on a day when risk was on and the flight-to-quality trade wasn’t there,” said Sean Simko, who manages $8 billion in bonds at SEI Investments Co. in Oaks, Pennsylvania. “We’re not going to see a move like this day after day in a straight line higher” in Treasury yields, he said.

Indirect bidders, a class of investors that includes foreign central banks, bought 33.9 percent of the notes today, compared with 41.6 percent at last month’s auction and an average of 46.7 percent for the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.9 percent, versus 13.6 percent at last month’s auction.

“It was a buyers’ boycott after a big sell-off,” said Nomura’s Goncalves. “It tells you that trying to call the highs in yields is too early. It may have to approach 2.50 percent before people get really interested in Treasuries.”

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.

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.

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.

--Editors: Greg Storey, Dennis Fitzgerald

To contact the reporters on this story: Susanne Walker in New York at; Daniel Kruger in New York at

To contact the editor responsible for this story: Dave Liedtka at

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