Bloomberg News

Treasuries Advance, Outperform Bunds, Amid European Debt Concern

November 16, 2011

Nov. 16 (Bloomberg) -- Treasuries rose, pushing the yield on the 10-year note down for the third straight day, amid concern the European debt crisis may worsen.

Ten-year notes outperformed German bunds and Spanish bonds fell for a third day before the nation sells securities at an auction tomorrow. Foreign holdings of U.S. debt increased 1.9 percent in September to a record. U.S. debt pared gains earlier as reports showing increased factory output and subdued inflation damped demand for haven assets.

“There’s tremendous concern about Europe,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Federal Reserve. “That’s helping the long end.”

Yields on 10-year notes dropped five basis points, or 0.05 percentage point, to 2 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 increased 13/32, or $4.06 per $1,000 face amount, to 100. The yield set a record low of 1.67 percent set on Sept. 23.

Thirty-year bond yields fell five basis points to 3.03 percent.

European Influence

U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe’s debt crisis worsens, Fitch Ratings said today in a statement.

“It’s the contagion factor that’s still bothering the market,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “You’ve got Europe and the question is whether this is just something they can snuff out and put to bed, or is it really going to ripple into a major problem.”

U.S. debt strengthened as German Chancellor Angela Merkel said the nation is prepared to cede some national sovereignty to the European Union to achieve closer economic and political ties and Mario Monti will act as finance minister in the new Italian government he is heading.

Spanish 10-year bonds fell for a third day amid speculation yields will surge at tomorrow’s auction of up to 4 billion euros ($5.4 billion) of securities due in January 2022. The European Central Bank was said to buy Italian and Spanish bonds to cap yields.

Yield Performance

The difference between the yields on the 10-year German bund and the 10-year U.S. Treasury narrowed to 0.19 percentage point from a three-month high of 0.28 percentage point reached on Nov. 10. The spread has averaged 0.14 percentage points this year.

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 two basis points to 51 basis points, the most since May 2010, according to data compiled by Bloomberg.

Volatility in the Treasury market remains high. Merrill Lynch & Co.’s MOVE index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, was at 106 today, higher than the 2011 average of 93.72. It touched a 2011 high of 117.8 on Aug. 8 and a 2011 low of 71.5 on May 31.

Price Swings

“There are a lot of people on the sidelines because volatility has forced some people to back up,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “People are starting to be nervous. You could slide quickly with volatility and illiquidity in the markets.”

About $205 billion of Treasuries changed hands as of 5:01 p.m. New York time, according to Icap Plc, the world’s largest interdealer broker. The figure is lower than the 2011 average of $298 billion, About $185 billion traded on Nov. 14, the lowest daily amount traded since Oct. 24.

Output at factories, mines and utilities climbed 0.7 percent after a revised 0.1 percent drop in September, figures from the Fed showed today.

U.S. yields remained lower today after a report showed the cost of living in the U.S. unexpectedly dropped last month. The consumer price index declined 0.1 percent from the prior month after a 0.3 percent rise, a report from the Labor Department showed today in Washington.

Price Levels

The median forecast called for no change in the consumer price index, according to a Bloomberg News survey. The so-called core rate that excludes volatile food and fuel costs rose 0.1 percent, matching September as the smallest gain this year.

“The inflation data was benign,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. “We’re not worried about any spike in inflation based on these numbers.”

Ten-year breakeven rates, the difference between yields on 10-year inflation-indexed bonds and nominal Treasuries of the same maturity, closed at 1.94 percentage points today, down from 2.02 percentage points yesterday. The rate reached a 2011 high of 2.67 percent on April 11 and a 2011 low of 1.67 percent on Sept. 23. That breakeven rate represents traders’ expectations for the rate of inflation during the life of the bonds.

The five-year, five-year forward break-even rate, which the Fed uses to help determine interest-rate targets, reached 2.4 percent today, lower than the 2011 average of 2.82 percent. The rate touched a 2011 high of 3.23 percent on Aug. 1 and a 2011 low of 2.09 percent on Sept. 22.

Fed View

Fed Bank of Boston President Eric Rosengren said the central bank still has power to boost the economy through lower interest rates.

“The common misconception is that rates are already low so further monetary policy actions will have no impact on the economy,” Rosengren said in the text of a speech in Boston today. Even small easing steps can be worthwhile when the economy is so badly damaged, Rosengren said.

Foreign holdings of Treasuries rose in September to a record $4.66 trillion, government data show. Foreigners held 48.4 percent of the $9.62 trillion of outstanding public Treasury debt in September, the most since May.

China, the largest foreign holder of U.S. government debt, increased its holdings of longer-term Treasury notes and bonds by $20.7 billion or 1.8 percent in September to $1.14 trillion, the biggest increase since March 2010, Treasury data show.

China pared its position in short-term bills to $4.4 billion, a 68 percent reduction. The move comes after China reduced its holdings of longer-term U.S. government securities by $40.2 billion or 3.5 percent in August, its biggest decline on record.

Japan’s Position

Japan, the second largest foreign holder of the debt, increased its position 2.2 percent to $956.8 billion after raising its stake 2.4 percent in August, Treasury data show.

Net buying of long-term equities, notes and bonds totaled $68.6 billion during the month, compared with net buying of $58 billion in August, the Treasury Department said in Washington today. Including short-term securities such as stock swaps, foreigners purchased a net $57.4 billion, compared with net buying of $89.3 billion the previous month.

The Fed sold $8.63 billion of Treasuries maturing 2013 to 2014 today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

Treasuries have returned 8.7 percent this year, the most since the financial crisis in 2008, Bank of America Merrill Lynch data show.

--With Assistance from Daniel Kruger in New York. Editors: Paul Cox, Dave Liedtka

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

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

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