Bloomberg News

U.S. 10-Year Notes Rise as European Yield Gains Fuel Concern

November 20, 2011

Nov. 19 (Bloomberg) -- Treasury 10-year notes rose, pushing yields to almost the lowest in a month, amid concern Europe’s leaders are failing to contain the region’s debt crisis, boosting demand for haven assets.

Thirty-year debt gained as yields rose at a Spanish bond auction, reflecting a widening of the debt crisis that began in Greece. Two-year note yields increased as the Treasury and the Federal Reserve plan to sell as much as $116.5 billion in notes next week amid a scarcity of short-term debt in a market seeking lower-risk investments.

“We are not just hearing Greece anymore, we are hearing about Italy and Spain and France, and that’s building up pent-up demand for Treasuries in fear of something critical occurring,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “There are still so many questions: How deep is the problem? How will it affect the banks? How will those banks affect us? When you have this much fear, you just don’t find many willing sellers.”

Ten-year note yields dropped five basis points, or 0.05 percentage point, this week to 2.01 percent. The 2 percent note due November 2021 rose 13/32, or $3.75 per $1,000 face amount, to 99 29/32. 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.

Yields on 30-year bonds fell 14 basis points to 2.99 percent. Two-year note yields gained five basis points to 0.28 percent.

Treasury Returns

Treasuries have returned 9.2 percent this year as of yesterday, according to Bank of America Merrill Lynch data. German bunds advanced 8.4 percent and Japanese government securities handed investors a 2.1 percent gain.

Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending Nov. 15, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 99,542 contracts on the Chicago Board of Trade. Net-short positions rose by 3,367 contracts, or 4 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

The Treasury Department 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.

Fed Sales

The Fed is scheduled to sell up to $17.5 billion in notes maturing two years and less on Nov. 21 under a program market participants have dubbed Operation Twist, in which it is divesting $400 billion in short-term notes and purchasing the same amount of longer-term securities. The Fed will offer $8.75 billion in notes maturing February to July 2012 and another $8.75 billion of securities maturing March to November 2014.

The record for notes sold in one week is $129 billion during the week of April 26, 2010, when the U.S. auctioned $44 billion in two-year notes, $42 billion in five-year securities, $32 billion in seven-year debt and $11 billion in five-year Treasury Inflation Protected Securities.

European Central Bank President Mario Draghi yesterday pressed governments to act on promises to end the sovereign debt crisis, indicating he’s not prepared to come to the rescue with large-scale bond purchases.

Italy’s Banks

Italy’s five biggest banks, including Intesa SanPaolo SpA, may need to raise a combined 6.1 billion euros ($8.2 billion) of additional capital as the Italian government bonds they own deteriorate in value.

“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.”

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.

Spanish Bonds

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.

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 47 basis points, the most since August 2009.

“Unless an actual deal takes place or something seriously negative occurs over in Europe, it’s going to be difficult for us to break out of this range,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York- based brokerage for institutional investors. “It’s been volatile but for the whole month we’ve been stuck between” 1.93 percent and 2.15 percent.

Economic Outlook

Treasuries pared weekly gains amid some signs of strength in the U.S. economy. Reports Nov. 17 signaled improvement in the weakest areas of the U.S. economy, with claims for unemployment benefits dropping to the lowest level in seven months and housing starts exceeding forecasts.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York- based research group said yesterday. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Economists at JPMorgan Chase & Co. in New York now see gross domestic product rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. Macroeconomic Advisers in St. Louis increased its forecast to 3.2 percent from 2.9 percent at the start of November, while New York-based Morgan Stanley & Co. boosted its outlook to 3.5 percent from 3 percent.

“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.”

The 10-year yield will advance to 2.44 percent by the middle of 2012, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

--With assistance from Susanne Walker in New York. Editors: Paul Cox, Kenneth Pringle

To contact the reporters on this story: Daniel Kruger in New York at; Cordell Eddings in New York at

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

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