Bloomberg News

Treasuries Drop on Speculation European Summit Will Stem Crisis

December 06, 2011

Dec. 6 (Bloomberg) -- Treasuries fell as speculation this week’s European summit in Brussels will succeed in resolving the debt crisis reduced demand for a refuge.

Thirty-year bonds led the decline as Germany’s Finance Minister Wolfgang Schaeuble called a downgrade warning for 15 euro-area governments from Standard & Poor’s the “best encouragement.” U.S. debt securities extended their drop after the Financial Times reported that Europeans are thinking about doubling the amount of the rescue package.

“The market is expecting positive developments out of Europe,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies Group Inc., one of the 21 primary dealers that trade with the Federal Reserve. “That’s contributing to the sell-off.”

Yields on 30-year bonds increased seven basis points, or 0.07 percentage point, to 3.10 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 fell 1 12/32, or $13.75 per $1,000 face amount, to 100 1/2.

Two-year note yields were little changed at 0.25 percent. Yields on 10-year notes advanced five basis points to 2.09 percent. The extra yield investors get to hold 10-year notes instead of two-year notes increased to 1.83 percentage points. The spread was 1.89 percentage points last week, the widest since Nov. 14.

About $180.5 billion of Treasuries changed hands today through ICAP Plc, the world’s largest interdealer broker. The figure was below the average of $294 billion for 2011, according to ICAP.

Fed Debt Buying

The Federal Reserve purchased $2.512 billion of Treasuries today due from February 2036 to August 2041 today as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to support the economy by keeping borrowing costs low.

Treasuries have risen this year as Europe’s failure to deal with its debt crisis encouraged investors to take refuge. U.S. government debt securities returned 8.9 percent in the first 11 months of 2011, while German bonds have increased 7.1 percent.

Negotiators are considering allowing the euro zone’s existing 440 billion euro ($590 billion) bail-out fund to continue running when a new 500 billion euro facility comes into force in mid-2012, the Financial Times reported.

European governments may unleash as much as 940 billion euros to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions told Bloomberg News in October, declining to be identified because a decision rests with political leaders.

S&P View

Bonds pared their losses earlier today as S&P said the European Financial Stability Facility may lose its top credit rating if any of its six guarantors face a downgrade from AAA.

“We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on CreditWatch, on one or more of EFSF’s guarantor members,” S&P said in a statement today.

The ratings company said it “could affirm the AAA ratings on EFSF and its issues if we affirm the rating on all six of EFSF’s guarantor members currently rated AAA.” Germany, France, the Netherlands, Finland, Austria and Luxembourg are the top- rated nations backing the rescue fund.

S&P said in a statement yesterday that it expected to “conclude our review of euro-zone sovereign ratings as soon as possible following the EU summit” on Dec. 8-9.

Ratings Outlook

The company said the ratings of euro-area nations may be lowered by up to one level for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg and up to two levels for the other governments.

“The market is waiting for Friday with the summit,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors.

The U.S. Treasury Department sold $35 billion in four-week bills at a rate of zero percent. The offering carried a bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 7.66, the highest since Bloomberg News started tracking auctions of the security in August 2001.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the interest rate swap spread, narrowed to 42.6 basis points. The measure of stress in credit markets rose to 59.25 basis points on Nov. 22, the highest since May 2010.

European Summit

The London interbank offered rate, today increased to 0.538 percent, the highest level since June 2010. The borrowing benchmark has fallen one day since June.

Germany Chancellor Angela Merkel and French President Nicolas Sarkozy stressed their determination before this week’s summit to save the euro.

The nations are “united in their resolve to take all necessary measures together with their European partners and the European institutions to safeguard the stability of the euro zone,” according to their statement e-mailed late yesterday after the S&P announcement.

“You have hopefully a better situation formulating in Germany,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Treasuries are in a defensive posture.”

Supply

Bank of America Merrill Lynch’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two- to 30 years, dropped yesterday to the 2011 average of 94 basis points, which is the lowest level since Sept. 21. The gauge reached a high of 117.8 basis points on Aug. 8, three days after S&P lowered the U.S. credit rating to AA+ from AAA.

The Treasury may announce Dec. 8 it will sell $32 billion in three-year notes, $21 billion in 10-year debt, $13 billion in 30-year bonds and $12 billion in five-year Treasury Inflation Protected Securities next week, the same as the previous auctions of similar maturities in October, according to primary dealer RBC Capital Markets in a note to clients today. The U.S. previously sold $12 billion in five-year TIPS on Aug. 18.

“Supply is contributing to the sell-off,” Bury of Jefferies said. “We’re expecting higher yield levels.”

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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


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