Bloomberg News

Treasuries Hold Loss on Speculation Swaps to Ease Debt Crisis

November 30, 2011

Dec. 1 (Bloomberg) -- Treasuries held losses on speculation central bank plans to reduce the cost of emergency dollar loans will help ease the European sovereign-debt crisis.

Thirty-year bonds had the biggest drop in almost a month yesterday as dollar funding costs for European banks fell for the first time in six days. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 1.31 percentage points below the euro interbank offered rate yesterday. It had touched 1.63 percentage points, the most expensive level since credit markets froze in October 2008.

“Yields should go higher,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. BNP’s U.S. unit is one of the 21 primary dealers that trade directly with the Federal Reserve. “Yesterday’s decision was a nice one. Yesterday’s movement was dramatic.”

Thirty-year yields were little changed at 3.05 percent as of 10:02 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.125 percent security due in November 2041 changed hands at 101 16/32. The rate increased 10 basis points yesterday, the most since Nov. 3. Ten-year notes yielded 2.06 percent today.

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said yesterday in a statement. The so-called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

“It’s going to free up some of the locked-up lending that’s going on in Europe,” said Brian Edmonds, interest-rate head at Cantor Fitzgerald LP in New York, another primary dealer. “It’s hard to look at this move and not think what they did was significant, but I don’t think it ends everything.”

The two-year swap spread, the difference between two-year swap rates and comparable maturity Treasury yields, an indication of perceived funding risk in the financial system, narrowed to 39 basis points yesterday, the least since Nov. 10.

--Editors: Nate Hosoda, Jonathan Annells

To contact the reporter on this story: Wes Goodman in Singapore at vwgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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