Bloomberg News

Treasuries Rise as Italy Debt Woes Mount, Spurring Refuge Demand

November 09, 2011

Nov. 9 (Bloomberg) -- Treasury 10-year note yields fell the most in a week on concern Italy will join Greece in struggling to form a regime strong enough to implement austerity measures following the resignation of Prime Minister Silvio Berlusconi.

Italian debt securities slumped, driving five- and 10-year yields to more than 7 percent for the first time since the euro was introduced in 1999, even as the European Central Bank was said to be buying the nation’s debt. U.S. 10-year notes rallied before today’s $24 billion sale of the securities. The $32 billion auction of three-year notes yesterday attracted the highest demand since at least 1993.

“It’s another tempest ripping through the peripheral market, and people are now concerned because this is one of the bigger dominos they’ve been trying to keep propped up,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of the 21 primary dealers that trade with the Federal Reserve.

Yields on U.S. 10-year notes dropped 10 basis points, or 0.1 percentage point, to 1.98 percent at 11:11 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 increased 29/32, or $9.06 per $1,000 face amount, to 101 10/32.

An advance of as much as three points in the 30-year bond pushed the yield down 12 basis points to 3.02 percent.

Stocks fell in Europe and the U.S., with the Standard & Poor’s 500 Stock Index declining 2.2 percent.

‘Headline Risk’

“You’re focused on headline risk,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Economic fundamentals are tossed out right now. This could get really bad really quick and the market is starting to see that.”

The Fed sold $1.33 billion of Treasury Inflation Protected Securities with maturities from April 2012 to April 2014 today. The sales were part of its program, known as Operation Twist, to replace $400 billion of short-term debt in its portfolio with longer-term securities in an effort to reduce borrowing costs further and counter rising risks of a recession.

The 10-year notes to be sold today yielded 2.01 percent in pre-auction trading, compared with the 2.27 percent yield at a previous sale of the securities Oct. 12.

The Oct. 12 sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.86, the lowest since November 2010 and compared with 3.03 at the September auction and an average of 3.15 for the past 10 sales.

Bid Data

Indirect bidders, a class of investors that includes foreign central banks, purchased 35 percent of the securities at last month’s auction, compared with the average for the past 10 sales of 47.9 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 6.4 percent at the October sale, compared with 11.1 percent of the notes at the September sale and a record 31.7 percent in August. The average for the past 10-sales is 10.6 percent.

U.S. government bonds have returned investors 8.5 percent in 2011, poised for the biggest annual gain since 2008, according to an index compiled by Bank of America Merrill Lynch.

Italian yields rose to euro-era records as LCH Clearnet SA raised the deposit factor charged for Italian bonds due in seven to 10 years. The deposit requirement will be raised to 11.65 percent, the French unit of LCH Clearnet said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7.

Europe’s Bonds

Clearing houses guarantee investors’ trades are completed by standing in the middle of two counterparties. They raise margin requirements to protect themselves against losses if one side of the trade fails.

“LCH raised the margin on Italian bonds, and that boosted demand for safety,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “Treasuries are trading up on that, as they still have safe-haven allure amid the euro-region’s debt crisis.”

Interest-rate swap spreads, a measure of stress in credit markets, rose to the highest in more than a year. The difference between the two-year swap rate and the comparable-maturity Treasury note yield increased 3.55 basis points to 39.63 basis points, according to data compiled by Bloomberg.

U.S. bonds fell and stocks rallied yesterday after Berlusconi offered to quit, stoking speculation the country will appoint a new leader who can implement measures to curb its debt load. Berlusconi’s coalition has been unraveling since contagion from the euro region’s debt crisis led the country’s bond yields to surge, prompting Italy’s European Union allies and the European Central Bank to demand more austerity measures to balance the budget and try to spur growth.

Italy Watch

“We still have uncertainty over the timeframe” of Berlusconi’s departure, Credit Agricole’s Chatwell said. “We don’t yet know what form a new government might take.”

Treasuries also rose as International Monetary Fund Managing Director Christine Lagarde said the global economy is at risk of a “lost decade” and after a Chinese report showed inflation slowed in the world’s second-biggest economy.

Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said.

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability and a collapse in global demand,” Lagarde said at a forum in Beijing today. “Ultimately, we could face a lost decade of low growth and high unemployment.”

--With assistance by Masaki Kondo in Singapore. Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Daniel Kruger in New York at Keith Jenkins in London at;

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

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