Bloomberg News

Treasuries Snap Four-Day Drop on China Slowdown, Europe Concern

December 01, 2011

Dec. 1 (Bloomberg) -- Treasuries snapped a four-day decline after a report showed China’s manufacturing contracted and as France and Spain prepared to sell bonds amid concern borrowing costs for the two nations will increase.

Ten-year U.S. yields fell from a two-week high set yesterday as Jan Hatzius, the chief economist at Goldman Sachs Group Inc., said the Federal Reserve may implement a third round of bond purchases called quantitative easing, or QE3, next year. The Fed and five other central banks yesterday announced plans to cut the cost of emergency dollar loans as European officials struggle to contain a regional debt crisis.

“People are fully expecting QE3,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker. “That can keep a cap on yields.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.06 percent at 9:02 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 gained 2/32, or 63 cents per $1,000 face amount, to 99 14/32. The rate climbed to 2.11 percent yesterday, the highest since Nov. 14.

The China Purchasing Managers’ Index fell to 49 last month from 50.4 in October, showing manufacturing in the nation shrank for the first time since February 2009. China said yesterday it plans to trim the amount of cash that banks must set aside as reserves on Dec. 5, the first reduction since 2008.

Further Easing

German 10-year bund yields dropped two basis points to 2.26 percent before the debt auctions by France and Spain and European Central Bank President Mario Draghi said the ECB’s program of buying government bonds “can only be limited.”

Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg survey last month. The Fed may buy about $545 billion in home-loan debt, based on the median of the firms that provided estimates.

“The Federal Reserve will go back to buying securities,” Hatzius said yesterday on a conference call with clients. “Those purchases will involve mortgage-backed securities. At the margin that is going to help the economy avoid recession.” Goldman Sachs is one of the primary dealers that trade directly with the Fed.

The ECB will cut its main rate to 1 percent from 1.25 percent when it meets on Dec. 8, a separate Bloomberg survey showed. The central bank reduced the rate by a quarter percentage point at its last meeting on Nov. 3.

Treasuries fell yesterday after the Fed said in a statement the premium banks pay to borrow dollars overnight from central banks will decline by half a percentage point to 50 basis points. The Fed coordinated the move with the ECB and the central banks of Canada, Switzerland, Japan and the U.K.

--Editors: Nicholas Reynolds

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

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


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