Bloomberg News

Treasuries Rally as S&P Warns the European Union on Top Rating

December 07, 2011

Dec. 7 (Bloomberg) -- Treasuries rose, pushing 10-year yields down the most in almost a month, on concern Europeans are struggling to resolve sovereign-debt turmoil before this week’s summit in Brussels and the European Central Bank’s meeting.

Yields fell to a one-week low after Standard & Poor’s warned the European Union that it may lose its top credit rating and an official said Germany is rejecting proposals to combine current and permanent euro-area rescue funds, spurring demand for safety. The extra amount banks pay over the U.S. government to borrow for three months increased to the highest level in more than two years.

“In the face of the looming announcements from the ECB tomorrow and the EU leaders on Friday, people don’t want to stake out big risk positions,” Chris Ahrens, head interest-rate strategist in Stamford, Connecticut, at UBS AG, one of the 21 primary dealers that trade with the Federal Reserve.

“Easing rates may alleviate near-term pressures, but it doesn’t alter the longer-term structural issues.”

Yields on 10-year notes decreased seven basis points, or 0.07 percentage point, to 2.02 percent at 3:19 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 advanced 18/32, or $5.63 per $1,000 face amount, to 99 3/4.

Yields earlier dropped eight basis points, the most on an intraday basis since Nov. 9. They touched 2.01 percent, the lowest level since Nov. 30.

A one-point gain in 30-year bonds pushed yields down five basis points to 3.05 percent. Two-year yields dropped two basis points to 0.23 percent. The Standard & Poor’s 500 Index slid 0.5 percent after earlier falling 1.1 percent.

Germany’s Stance

“The U.S. as a safe harbor is benefiting from the flight to quality, given the broader uncertainties coming out of Europe,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford. “There are headlines suggesting the situation in Europe will not be as simple a fix as the market thought.”

The EU’s AAA long-term rating and the ratings of some of the region’s largest banks including BNP Paribas SA, Commerzbank AG and Deutsche Bank AG may be cut by S&P. The ratings are on “creditwatch negative,” the company said in separate statements.

Treasuries have risen this year as Europe’s failure to deal with its fiscal turmoil encouraged investors to take refuge. U.S. debt securities have returned 8.7 percent this year, the most since the 2008 financial crisis, according to a Bank of America Merrill Lynch index.

Market ‘Uncertainty’

“There’s a lot of uncertainty out there in the market,” said Michael Cloherty, head of U.S. interest-rate strategy in New York at RBC Capital Markets, in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Everyone’s waiting to see what type of news comes out on Friday. It’s a possibility that we’re disappointed again.” The Royal Bank of Canada unit is a primary dealer.

Germany will oppose any attempt to change an agreed-upon sequence in which the permanent European Stability Mechanism will take over from the current rescue fund at an appointed time, a German official told reporters in Berlin today on condition of anonymity because the negotiations are private.

The rejection came amid divisions among the 27 European Union member states on the latest bid to deliver the euro area from its two-year-old crisis as the leaders head to a Dec. 8-9 summit in Brussels.

In a sign of reluctance to lend, the TED spread, or the difference between the three-month U.S. bill rate and the London interbank offered rate, or Libor, climbed to 54 basis points, the highest level since June 2009. Three-month Libor increased to 0.54 percent, while the rate on U.S. bills remained at zero.

ECB Outlook

The ECB may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials who spoke on condition of anonymity because the discussions are private. Options include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to ease the flow of credit, the officials said. Two said a reduction in the 1.25 percent target lending rate is likely.

“Some people are expecting a 25 basis point cut, and some are expecting a 50 basis point cut,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “If they announce a 25 basis point cut, that may disappoint the market a little bit.”

The Fed sold today $1.33 billion of Treasury Inflation Protected Securities maturing from April 2012 to April 2014 under a program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to cap borrowing costs and support the economy.

U.S. Offerings

The U.S. government may announce tomorrow that it will offer $32 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds next week, the same as in the previous auctions of similar securities in October, RBC Capital Markets said in a research note to clients yesterday. The government is also probably due to auction $12 billion of five-year TIPS, according to RBC.

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 93 basis points, the lowest level since August, and just below the 2011 average of 94 basis points. 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+.

--With assistance from Gabi Thesing and Simone Meier in Frankfurt. Editors: Dennis Fitzgerald

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

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

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