Bloomberg News

Treasury Bonds Rise as Yields in Spain, France Fuel Debt Concern

November 17, 2011

Nov. 17 (Bloomberg) -- Treasury bonds rose on concern Europe’s leaders are failing to contain the region’s debt crisis as borrowing costs jumped at Spanish and French bond sales.

Bond yields rose from the Netherlands to Finland and Austria, indicating European officials are struggling to convince investors they can stem the debt crisis that began in Greece. U.S. debt erased gains earlier as a decline in Italian bond yields briefly eased concern the region’s sovereign-debt crisis is worsening. The Treasury sold $11 billion of 10-year Treasury Inflation Protected Securities at yield above the forecast in a Bloomberg survey of bond dealers.

“The results weren’t that bad, given what is going on in the world,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve. “There has been a flight to liquidity into nominal Treasuries, and when that happens these auctions can go much worse.”

Yields on 30-year bonds fell five basis points, or 0.05 percentage point, to 2.98 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 rose 31/32, or $9.69 per $1,000 face amount, to 102 27/32.

Ten-year note yields dropped four basis points to 1.96 percent. The yield reached as low as 1.94 percent, and traded as high as 2.04 percent. The yield set a record low of 1.67 percent on Sept. 23.

Yield Differences

The difference between yields on Treasuries maturing in two and 30 years narrowed to 2.72 percentage points, the smallest since Oct. 6, as investors sought safety amid concern the outlook for global growth will continue to slow.

“We continue to be buffeted by news out of Europe,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors Inc. in Pittsburgh. “Yields are likely to rise again once volatility in Europe settles down.”

The 10-year TIPS sale drew a yield of 0.099 percent, compared with 0.060 percent forecast, according to the average in a Bloomberg News survey of seven of the Fed’s primary dealers.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.64 versus an average of 2.79 for the past 10 sales. The Sept. 22 auction of $11 billion of the securities sold at a record low yield of 0.078 percent.

The sale resulted in a net pay-down of $51.4 billion as $62.4 billion of maturing securities are held by the public and the Fed, including $57.4 billion by the public and $5 billion by the central bank, according to Treasury data.

Note Sales

The Treasury Department also announced plans to sell $99 billion of notes and bonds next week. It will auction $35 billion of two-year notes on Nov. 21, $35 billion of five-year notes on Nov. 22 and $29 billion of seven-year notes on Nov. 23.

The Fed bought $4.68 billion of Treasuries maturing from 2020 to 2021 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.

The European Central Bank bought more Italian government bonds, following acquisitions earlier today, said two people with knowledge of the trades, who declined to be identified because the deals are private.

Sovereign bond yields rose across Europe as German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil.

Market Stress

The gap between the London interbank offered rate and the overnight index swap, or what traders expect the Fed’s benchmark to be over the term of the contract, widened to 39 basis points, the highest since June 2009. U.S. five-year swap spreads climbed to as much as 45.8 basis points, the most since August 2009.

Italy’s bonds surged as Prime Minister Mario Monti pledged urgent action to curb the region’s second-biggest debt in his debut as premier, saying Italy’s ability to shore up its finances is critical to the survival of the euro.

The yield on Italy’s 10-year bond fell 17 basis points to 6.84 percent after touching a high of 7.15 percent.

Treasuries gained earlier as Spain sold 3.56 billion euros of a new benchmark 10-year bond maturing in 2022, the Bank of Spain said, compared with a maximum target of 4 billion euros. The average yield was 6.975 percent. That compared with 5.433 percent when it sold bonds due in April 2021 last month. France sold 6.98 billion euros of notes and 1.07 billion euros of inflation-linked debt today.

Spanish Bonds

Spanish bonds fell for a fourth day, pushing 10-year yields up 35 basis points to 6.76 percent, while equivalent-maturity

Applications for U.S. jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, the lowest level since April, Labor Department figures showed today in Washington. Economists forecast 395,000 claims, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls fell to a three-year low.

“The market got a little ahead of itself,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed. “You get some stability in Europe, I think the Treasury market probably wants to sell off a little bit.”

Treasuries have returned 8.9 percent this year, the most since the financial crisis in 2008, Bank of America Merrill Lynch data show.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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


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