Bloomberg News

Treasuries Fall Before Sale Announcement, Europe Crisis Meeting

November 02, 2011

Nov. 2 (Bloomberg) -- Treasuries fell, snapping a three-day gain, on speculation yields have fallen too low before the U.S. announces the size of auctions scheduled for next week.

Longer-maturity debt led losses after yesterday’s rally as European leaders prepared to hold talks today to tell Greece there is no alternative to the budget cuts in the bailout plan after Prime Minister George Papandreou called a referendum. The Federal Reserve issues its policy statement today.

“The bond market is correcting after a recent massive rally which was triggered by renewed concern over a Greek debt default,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “We’ve seen some stability on equity markets. That and upcoming supply news are putting some pressure on Treasuries. Some in the market might have also readjusted positions ahead of the Fed’s decision.”

Yields on 10-year notes rose five basis points, or 0.05 percentage point, to 2.04 percent at 7:44 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.125 percent note due in August 2021 fell 15/32, or $4.69 per $1,000 face amount, to 100 23/32. The yields dropped yesterday to 1.95 percent, the lowest level since Oct. 6.

The difference between two- and 10-year yields increased for the first time in four days, expanding four basis points to 179 basis points. The spread shrank yesterday to 172 basis points, the narrowest since Oct. 7.

U.S. Auctions

The Treasury will sell $32 billion of three-year notes on Nov. 8, $24 billion of 10-year debt on the following day and $16 billion of 30-year bonds on Nov. 10, Wrightson ICAP predicts. The government will raise $48.1 billion of new cash, according to the company, an economic advisory firm in Jersey City, New Jersey, that specializes in government finance.

Papandreou will fly to France today to face European leaders surprised by his decision to put the bailout plan to a national vote and call a confidence vote in parliament.

Treasuries rallied over the last three days after Papandreou called a referendum and a parliamentary confidence vote, fueling concern the country will be pushed into default if voters reject it. Thirty-year yields slid 46 basis points during the rally, the biggest three-day decrease since credit markets froze in 2008.

“The core problems still exist in Europe,” said Zeal Yin, who helps oversee the equivalent of $39.9 billion as a money manager in Taipei at Shin Kong Life Insurance Co., Taiwan’s second-largest life insurer. “The global economy is starting to cool. If the problems persist, record low yields are possible by year-end.” Yin said he bought 10-year notes at yields of 2.2 percent over the past few days.

Swap Spread

The two-year swap spread was 33 basis points, more than the 24 basis point average for this year. In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed component and the yield on similar- maturity Treasuries.

“The swap spread brings the credit issues of the whole euro crisis to the forefront,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 21 primary dealers that trade with the Fed. “Banks are paying more to lend to each other because it’s still very uncertain how this will end up, and funding concerns are real.”

U.S. government bonds are little changed since the end of September, according to Bank of America Merrill Lynch indexes. The MSCI All Country World Index of Index of stocks returned 7 percent in the period, according to data compiled by Bloomberg.

Fed Outlook

Fed officials are probably engineering a third round of large-scale asset purchases, while they are unlikely to announce a decision today, according to a Bloomberg News survey.

Sixty-nine percent of the economists surveyed say Fed Chairman Ben S. Bernanke will embark on a third round of quantitative easing with 36 percent predicting the move in the first quarter of next year, according to the poll of 42 economists from Oct. 26 to 31.

Fed officials are weighing further easing even after economic growth last quarter accelerated to the fastest pace in a year. Vice Chairman Janet Yellen and Chicago Fed President Charles Evans said in speeches last month that more action may be needed to reduce an unemployment rate stuck around 9 percent or higher for 30 months.

--Editors: Dennis Fitzgerald, Nicholas Reynolds

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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