Bloomberg News

Treasuries Fluctuate on Signs Inflation Cooling, Euro Turmoil

November 16, 2011

Nov. 16 (Bloomberg) -- Treasuries fluctuated before a report forecast to show U.S. consumer prices were little changed last month and as the European Central Bank was said to buy Italian and Spanish bonds to cap yields.

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

“Inflation data may help to underpin demand for Treasuries, but risk sentiment is the biggest driver at the moment,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “People are concerned about the euro-zone debt crisis.”

Yields on 10-year notes fell one basis point, or 0.01 percentage point, to 2.04 percent at 7:41 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 increased 3/32, or 94 cents per $1,000 face amount, to 99 22/32.

The U.S. consumer-price index didn’t climb for the first time in four months after rising 0.3 percent in September, according to the median forecast of 86 economists in a Bloomberg News survey before today’s Labor Department report.

Producer prices fell in October by the most in four months as the cost of energy and automobiles decreased, Labor Department figures showed yesterday.

Yield Outlook

“We expect any moves higher in yields to be relatively shallow and believe there is scope for 10 years to retest and ultimately break below the 1 3/4 level,” Dominic Konstam, the global head of rates research at Deutsche Bank AG in New York, wrote in a report published yesterday. “The curve is biased to flatten bullishly in our view.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of the outlook for consumer prices over the life of the debt known as the break-even rate, has narrowed to 2.01 percentage points from a 2011 high of 2.67 in April.

Ten-year notes yield negative 1.86 percent after accounting for prices in the economy. The so-called real yield was minus 2.11 percent in October, a level not seen since 1980.

Treasuries have returned 2 percent return over the past three months, compared with a 1.2 percent gain in TIPS, Bank of America Merrill Lynch data show.

Industrial Output

Industrial production increased in 0.4 percent in October, double the prior month’s rate, according to the median forecast of economists before today’s Fed report.

Retail sales rose 0.5 percent last month, compared with the median economist forecast for 0.3 percent growth, Commerce Department data showed yesterday.

Demand for U.S. assets from investors outside the nation probably decreased in September, according to a Bloomberg survey before the Treasury Department reports the figure today.

Net buying of long-term notes, bonds and equities totaled $55 billion, compared with $57.9 billion in August, which was the highest level this year, according to the survey.

U.S. interest-rate swap spreads surged to levels that indicate the move may be about to reverse. The two-year spread widened to 49.6 basis points today, a 17-month high.

The 14-day relative strength index for the spread was at 75 today, according to Bloomberg data, exceeding the 70 level some traders see as a signal an asset’s price change is overdone. A tumble in European bonds is driving the trade and will still influence where it goes next, said Peter Jolly, head of market research at National Australia Bank Ltd.

Demand for Safety

Investors use swaps to exchange fixed and floating interest rates. The difference, or the gap between the fixed component and the yield on similar-maturity Treasuries, has increased as Europe’s sovereign-debt crisis spurred demand for the relative safety of government debt.

Two-year note yields were little changed at 0.24 percent today. Yields on 30-year bonds decreased less than one basis point to 3.08 percent.

The Federal Reserve plans to sell as much as $8.75 billion of Treasuries due from 2013 to 2014 today. It announced in September it would replace $400 billion of short-maturity debt with longer-term securities to contain borrowing costs.

The yield on Italy’s 10-year bonds fell 18 basis points to 6.89 percent and Spain’s dropped four basis points to 6.29 percent. Italian yields were for the second time in a week above the 7 percent threshold that prompted Greece, Ireland and Portugal to seek European Union bailouts.

The ECB was said to buy the nations’ debt, according to at least two people with knowledge of the transactions, who declined to be identified because the deals are confidential. An ECB spokesman declined to comment.

--Editors: Dennis Fitzgerald, Matthew Brown

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

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


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