Bloomberg News

U.S. 10-Year Yield Below 2% as Europe Crisis Fuels Refuge Demand

November 27, 2011

Nov. 26 (Bloomberg) -- Treasuries rose, pushing the yield on the 10-year note down for a second week, as concern the European debt crisis may escalate drove investors to the safety of U.S. government debt.

Benchmark 10-year yields closed at less than 2 percent for the first time in eight weeks and fell below comparable German bunds. The yield difference widened to 0.31 percentage point, the most since April 2009, as borrowing costs in the European region soared. U.S. auction yields dropped to record lows as the Treasury sold $99 billion in notes. A report Dec. 2 is forecast to show the U.S. added 120,000 jobs in November.

“There’s not a lot of confidence in places outside the U.S. right now,” said Christopher Bury, co-head of fixed-income rates at Jefferies Group Inc., one of the 21 primary dealers that trade with the Federal Reserve. “The overall risks have been increasing and that’s contributed to Treasuries performance over the last week. Discussions out of Europe are not making much headway and the markets are not trading very well.”

Ten-year note yields dropped five basis points, or 0.05 percentage point, on the week to 1.96 percent in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 rose 13/32, or $4.06 per $1000 face amount, to 100 10/32.

Yield Records

The yield dropped to 1.87 percent on Nov. 23, approaching the record low 1.67 percent set Sept. 23.

Trading in Treasuries closed at 2 p.m. yesterday in New York, after being shut the previous day for Thanksgiving.

U.S. yields set record lows at auctions this week even as the U.S. deficit reduction Congress’s supercommittee failed Nov. 21 to reach a deal, setting the stage for $1.2 trillion in automatic spending cuts, and as the Fed and the Treasury sold $116 billion in notes.

A $35 billion two-year note auction on Nov. 21 produced the highest bid-to-cover ratio on record for a fixed-coupon Treasury note or bond, 4.07, while a $35 billion five-year debt sale the next day was priced at a record low yield for the securities of 0.937 percent. A $29 billion seven-year auction on Nov. 23 garnered a record low yield of 1.415 percent.

The Fed sold $8.531 billion of securities maturing in February 2012 through July 2012 on Nov. 21 as part of its plan to lower borrowing costs that’s become known as Operation Twist, according to the Fed Bank of New York’s website. The central bank also sold $8.63 billion in Treasuries maturing from March 2014 to November 2014, in a second operation that day.

Supply Handle

“Supply has never been a problem when the markets are in turmoil,” Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker said Nov. 21. “There doesn’t seem to be any concrete solutions in Europe.”

Germany failed to sell all the bonds it wanted to at an auction Nov. 23, sparking concern investors are becoming wary of even the most creditworthy euro-region nations. Total bids at the auction of the bunds due in January 2022 amounted to 3.889 billion euros ($5.2 billion) out of a maximum target for the sale of 6 billion euros, according to Bundesbank data. The yield on the 10-year German bund climbed yesterday to 2.26 percent, the highest since Oct. 28.

“The market is anticipating that if Germany is going to be wrapping or guaranteeing in some way other countries debts, then German yields should be higher,” Bury said.

Merkel Rules

German Chancellor Angela Merkel on Nov. 24 ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.

The cost of insuring European sovereign bonds against default soared to a record and Spanish, Italian and Belgian two- year notes slumped. Two-year Italian yields climbed 58 basis points to a euro-era record high 7.90 percent.

Italy had to pay almost 7 percent to sell six-month bills at an auction yesterday, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The Italian Treasury paid 6.504 percent to auction 8 billion euros of the six-month debt, almost twice the 3.535 percent a month ago and the highest since August 1997.

“With European yields off so much, it will take a while for domestic traders to reassess relative value,” said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. “If we become the new ultra safe haven, we can’t short Treasuries.”

Stress Measure

Interest-rate swap spreads, a measure of stress in credit markets, climbed this week. The difference between the two-year swap rate and the comparable-maturity Treasury note yield increased a basis point yesterday to 54.81, near the highest since May 2010, according to data compiled by Bloomberg.

European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts, German Finance Minister Wolfgang Schaeuble suggested yesterday.

There may be changes to the European Stability Mechanism, due to come into force in 2013. European leaders persuaded bondholders last month to accept a 50 percent loss on their holdings of Greek debt as part of an interim rescue effort.

Europe’s debt crisis and the ensuing demand for safety has pushed Treasuries up 9.7 percent this year, set for the biggest annual gain since 2008, according to Bank of America Merrill Lynch data. German bunds returned 7 percent and Japanese bonds advanced 2 percent, the indexes show.

The Labor Department may report a 120,000 increase in November nonfarm payroll jobs, up from an 80,000 gain in October, according to the median estimate in a Bloomberg News survey of 32 economists.

--Editors: Paul Cox, Greg Storey

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

To contact the editor responsible for this story: Robert Burgess at

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