Bloomberg News

Treasuries Climb as Debt-Plan Concern Damps Appetite for Risk

October 28, 2011

Oct. 28 (Bloomberg) -- Treasuries rose, snapping a two-day drop, as concern that European officials may need to take further steps to tame the region’s debt crisis damped investor appetite for riskier assets.

U.S. 30-year bonds pared their fifth weekly decline, the longest losing streak in more than two years. Benchmark 10-year note yields fell from an 11-week high amid speculation the American economy isn’t expanding fast enough to justify this month’s Treasuries rout. Fitch Ratings said part of Europe’s plan to end debt turmoil amounts to a Greek default.

“We’ll probably revisit this whole fire drill some time in the next six months,” said Brett Rose, an interest-rate strategist at in New York at Citigroup Inc., one of the 22 primary dealers that trade with the Federal Reserve. “We’re far from out of the woods on this.”

Yields on U.S. 30-year bonds dropped eight basis points, or 0.08 percentage point, to 3.38 percent at 5:08 p.m. New York time, according to Bloomberg Bond Trader prices. The yields, which earlier touched 3.48 percent, rose 11 basis points on the week. They climbed 24 basis points yesterday in the biggest jump since Aug. 11. The 3.75 percent securities due in August 2041 climbed 1 18/32, or $15.63 per $1,000 face amount, to 107.

Ten-year yields slid eight basis points to 2.32 percent, after earlier rising to 2.42 percent, the most since Aug. 9. The Standard & Poor’s 500 Index fell as much as 0.6 percent.

Italian Bonds

Treasuries retreated after Italy sold less than its maximum target at a bond auction today, raising concern officials haven’t done enough to curb the debt crisis. The Treasury in Rome sold 7.93 billion euros, less than the maximum 8.5 billion- euro target, of four different bonds. The yield on Italy’s 10- year bond rose 15 basis points to 6.02 percent, a one-week high.

The European agreement on a 50 percent haircut on Greek bonds may create an event of default if accepted, Fitch Ratings said in a statement.

If it’s accepted, “the 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria,” the statement said.

European leaders also agreed at summits this week to expand the euro region’s bailout fund and recapitalize banks.

German Chancellor Angela Merkel said the debt crisis won’t be over in a year, urging Greece to hold to its program of budget austerity and strive to return to competitiveness.

Merkel said deficit spending “won’t work any more” because it weakens Europe’s global competitiveness. The euro area faces a confidence crisis that risks turning away investors as countries such as China and India grow, Merkel said in a speech in Deggendorf, Germany. It’s “not going to get rid of that in a day, with one big bang, or in a year,” she said.

‘Lot of Questions’

“There are still a lot of questions about the agreement in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Everything is focused on default, but you also have growth. How do you get growth when you have fiscal austerity?”

The weaknesses of Europe’s common currency area, including a dearth of bank funding and anemic economic growth, weren’t properly addressed in the measures announced yesterday to stem investor panic, said Harvard University economist Kenneth Rogoff and Jonathan Loynes at Capital Economics Ltd. in London.

“Even in a fairly short period, doubts will start to grow again,” Rogoff, a former International Monetary Fund chief economist, said as a compensated speaker at the Bloomberg FX11 Summit in New York yesterday.

Fed Sale

The Fed sold $8.87 billion of Treasuries today maturing from October 2013 to February 2014, according to its website. It’s swapping $400 billion of shorter-term debt in its holdings through June for securities due in as much as 30 years to spur the economy by keeping long-term interest rates down.

The Federal Open Market Committee meets Nov. 1-2 to discuss monetary policy. It announced Sept. 21 the program to lengthen maturities in its portfolio. The effort is known as Operation Twist after a similar program in the 1960s.

The central bank may clarify benchmarks it wants the economy to reach before it’s ready to raise borrowing costs from near zero, said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

“That’s the most expected thing,” Roth said. Such targets would make policy “clearer,” he said.

Unemployment held at 9.1 percent in September and home prices in 20 U.S. cities dropped more than forecast in August, according to government and industry reports.

Debt-Reduction Deadlock

Lawmakers continue to disagree on the amount of spending cuts and new tax revenue needed to trim at least $1.2 trillion in spending during the next 10 years. The congressional supercommittee seeking a long-term debt-reduction deal remains deadlocked over Democrats’ insistence on tax increases as the Nov. 23 deadline approaches.

Still, Treasuries have lost 1.9 percent in October as of yesterday, the most in a month since December 2009, a Bank of America Merrill Lynch index shows. German bunds fell 1.5 percent in the month and Japanese government debt was little changed.

Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 30-year bond futures in the week ending Oct. 25, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 1,096 contracts on the Chicago Board of Trade.

--With assistance from Paul Dobson in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: 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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