Bloomberg News

Treasuries Climb as Italy Bonds Drop on Europe, Japan Sells Yen

October 31, 2011

Oct. 31 (Bloomberg) -- Treasuries climbed, pushing 30-year yields down the most in more than a year, as Italian and Spanish bonds fell on concern Europe will be unable to curb its sovereign debt crisis and Japan sold yen to stem its rally.

Benchmark 10-year notes rose for a second day as MF Global Holdings Ltd. filed for bankruptcy protection after making bets on European sovereign debt. Ten-year yields have dropped 28 basis points in two days on speculation the Federal Reserve will buy more debt in coming months to support the economy. The U.S. raised its estimate for fourth-quarter government borrowing.

“It’s a risk-off trade,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of the 22 primary dealers that trade directly with the Fed. “The rally started off with the bleaker picture in Europe and the announcement by Japan about the intervention. People are not as comfortable with the situation in Europe, and there’s pressure there.”

Thirty-year bond yields tumbled 25 basis points, or 0.25 percentage point, to 3.13 percent at 5:26 p.m. New York time, according to Bloomberg Bond Trader prices. It was the biggest intraday drop since May 6, 2010. The 3.75 percent securities due in August 2041 increased 4 30/32, or $49.38 per $1,000 face amount, to 111 30/32.

Ten-year note yields fell 20 basis points to 2.11 percent.

October Loss

Treasuries have lost 1.4 percent in October, the most since December 2010, according to Bank of America Merrill Lynch data. German bunds have fallen 1.5 percent.

Stocks dropped as investors sought safety amid concern accords by European leaders last week won’t be enough to keep the sovereign debt crisis from spreading. The Standard & Poor’s 500 Index slid 2.5 percent.

The Treasury increased its estimate for fourth-quarter government borrowing by $21 billion to $305 billion, reflecting in part lower revenue and higher spending. That set the stage for the department’s quarterly refunding announcement later this week. Officials on Nov. 2 will announce their plans for sales of longer-term notes and bonds during the current quarter.

MF Global confirmed it was suspended as a Fed primary dealer. The New York Fed said the firm has been suspended from new business with the central bank and until it establishes that it’s “fully capable of discharging the responsibilities” required. The decision was noted in a statement on the regulator’s website.

The New York-based futures broker tumbled 67 percent last week and its bonds started trading at distressed levels. The company’s regulated U.S. broker-dealer unit, MF Global Inc., didn’t file for bankruptcy.

European-Debt Bets

MF Global owns $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, it said in an Oct. 25 presentation. Concern that it might lose money on the holdings amid Europe’s debt crisis led to demands from regulators to boost capital, credit downgrades, margin calls and bankruptcy, MF Global President Bradley Abelow said in an affidavit.

The firm’s turmoil stirred discussion of the 2008 global financial crisis. Bear Stearns Cos., once the fifth-biggest U.S. securities firm, was acquired by JPMorgan Chase & Co. in March 2008 in a transaction brokered by the Fed after the firm lost the ability to borrow. Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history six months later.

‘Bad Memories’

“When the market gets news like this, it rekindles bad memories,” said James Kochan, chief fixed-income strategist at Wells Fargo Fund Management LLC in Menomonee Falls, Wisconsin. “The typical reaction is to buy Treasuries.”

U.S. government bonds gained as the yen slumped the most on an intraday basis since 2008 against the dollar, dropping more than 4 percent after earlier strengthening to a post-World War II record of 75.35. The yen weakened after Japan sold the currency, whose strength threatens the nation’s exporters. Japan is the second-largest overseas holder of U.S. debt behind China.

Treasuries also rose as some investors bought debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays Plc U.S. Treasury Index. Duration measures price sensitivity to changes in yield, and is partly a function of maturity.

The Barclays index shows estimated duration forecast to extend by 0.09 years for October, compared with 0.08 years at the end of September, according to the firm, a primary dealer.

Italian 10-year yields added as much as 16 basis points to 6.18 percent. Spanish 10-year note yields rose as much as 15 basis points to touch 5.66 percent, the highest since Aug. 8.

‘Reality Check’

Treasuries slid and stocks surged on Oct. 27 after European officials announced a plan to resolve the region’s debt crisis. They boosted their rescue fund to 1 trillion euros ($1.4 trillion) and persuaded bondholders to take 50 percent losses on Greek debt. They also agreed on a recapitalization of banks.

Today “is a reality check of that market after the temporary risk-on trade last week,” said Christopher Bury, co- head of fixed-income rates in New York at the primary dealer Jefferies & Co.

The Fed opens a two-day meeting tomorrow. Fed Vice Chairman Janet Yellen has also said the central bank should be prepared to do more to spur economic growth. The Fed previously purchased $2.3 trillion in debt in two rounds of quantitative easing.

The jobless rate held at 9.1 percent in October, economists in a Bloomberg survey forecast before data due Nov. 4.

At its last session the central bank agreed on the nine- month maturity-extension program, called Operation Twist after a similar effort in the 1960s.

The central bank will buy about $45 billion in long-term Treasuries and sell $43 billion in shorter-term debt in November, according to its website. Its first operation this week is a sale tomorrow of up to $8.75 billion of Treasuries tomorrow due in 2012 and 2013.

--With assistance from Vincent Del Giudice and Bob Willis in Washington, Daniel Kruger in New York and Keith Jenkins in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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


Reviving Keynes
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus