Bloomberg News

Treasuries Snap Loss as Rates Show Banks Are Reluctant to Lend

December 07, 2011

Dec. 7 (Bloomberg) -- Treasuries snapped a two-day loss as money-market rates suggest banks are the most reluctant to lend in 30 months before European leaders meet tomorrow to address the region’s sovereign-debt crisis.

The difference between the three-month London interbank offered rate and the overnight index swap widened to 44 basis points. The spread, which increases as banks become less willing to lend to each other, was the most since June 2009. Demand for safety has made Treasuries the best performing bonds in the past six months as Europe’s fiscal woes threatened to curb global economic growth.

“There’s a chance that yields will decline again,” said Takuya Yamamoto, an investor at Diam Co. in Tokyo, which manages the equivalent of $127.4 billion. “It’s very difficult to solve the European problem.”

U.S. 10-year rates held at 2.09 percent as of 6:53 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 changed hands at 99 6/32. The yield increased six basis points, or 0.06 percentage point, over the past two days.

Japan’s 10-year rate was little changed at 1.045 percent. It has declined from 1.09 percent on Dec. 1, which was the highest since July.

Treasuries due in 10 years and longer returned 20 percent in the past six months, the most among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Benchmark 10-year yields touched a record low of 1.67 percent on Sept. 23.

Spurred by S&P

Volatility in the market has declined since the start of November, Merrill Lynch’s Move index shows. The gauge dropped to 93 yesterday, the least since August. The index measures price swings in U.S. government securities based on options.

Treasuries fell yesterday on speculation the European summit starting in Brussels tomorrow will succeed in quelling the crisis.

Thirty-year bonds led the decline yesterday as German Finance Minister Wolfgang Schaeuble called a downgrade warning for 15 euro-area governments from Standard & Poor’s the “best encouragement” to drive toward a solution at the meeting. U.S. debt securities extended their slide after the Financial Times reported that European policy makers are considering doubling the amount of the regional rescue package.

JPMorgan Chase & Co.’s weekly Treasury client survey showed the number of wagers on a decline in U.S. government securities among the bank’s investors exceeded bets for a gain for the first time since Sept. 12. Wagers on a drop increased to 17 percent on Dec. 5 from 11 percent on Nov. 28, while bets on an advance decreased to 13 percent from 19 percent, according to a report from analysts led by Terry Belton, global head of fixed- income and foreign-exchange research.

Survival in Doubt

The Organization for Economic Cooperation and Development cited doubts about the survival of Europe’s monetary union as the main risk to the world economy in a report last week.

The Treasuries rally is about to end, judging by the banks and securities companies surveyed by Bloomberg News. Ten-year rates will advance to 2.42 percent by June 30, the responses show, with the most recent forecasts given the heaviest weightings.

“The U.S. economy will grow gradually,” said Kei Katayama, leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd. in Tokyo, which oversees the equivalent of $63.8 billion including Asia’s second-biggest bond fund. “Yields will eventually go up, recognizing that the U.S. economy is not so bad.”

Unemployment, Confidence

The number of Americans claiming unemployment benefits for the first time probably fell to 395,000 last week from 402,000, according to the median prediction of economists surveyed by Bloomberg before the report tomorrow. The U.S. jobless rate fell to 8.6 percent, the lowest level since March 2009, the Labor Department reported Dec. 2.

A Thomson Reuters/University of Michigan index of consumer sentiment rose to 65.8 in December from 64.1 in November, a separate surveyed shows before the Dec. 9 report.

The Federal Reserve is replacing $400 billion of shorter- maturity Treasuries its holdings with longer-term debt to keep rates down and foster growth, in a plan it announced in September. The central bank is scheduled to sell as much as $1.5 billion of Treasury Inflation Protected Securities maturing from 2012 to 2014 today as part of the program, according to its website.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he has a “risk off” view ahead of the European summit.

“EU plan appears to kick the can for another 3-6 months,” Gross wrote on Twitter yesterday. “It’s a never-ending story.”

Gross, who is based in Newport Beach, California, increased Treasury holdings in his $241 billion Total Return Fund to 19 percent of assets in October from 16 percent in September, according to the Pimco website.

--With assistance from Susanne Walker in New York and Kristine Aquino in Singapore. Editors: Garfield Reynolds, Jonathan Annells.

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

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


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