Bloomberg News

Treasuries Fall on Concern Refuge Demand Pushed Yields Too Low

December 09, 2011

Nov. 25 (Bloomberg) -- Treasuries fell on concern investors seeking refuge from volatility in the European sovereign-debt markets may have pushed U.S. government yields too low.

U.S. debt extended losses after reports cited European Union officials as saying that euro-area nations are considering dropping private-sector involvement from their permanent bailout fund, damping demand for haven assets. Benchmark 10-year yields traded below two percent for a fourth straight day as borrowing costs in Spain and Italy climbed amid concern European leaders are struggling to contain the region’s sovereign-debt crisis.

“It will take a while to find out how much real demand there is for Treasuries when they are among the lowest yields out there,” said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. “We’ve immediately entered a period of assessment for fixed-income valuations. Anytime that we have a big move in a market, people have to stop what they

Ten-year note yields rose eight basis points, or 0.08 percentage point, to 1.96 percent in New York trading, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 fell 23/32, or $7.19 per $1000 face amount to 100 10/32. The yield fell five basis points this week.

Early Close

Trading in Treasuries closed at 2 p.m. today in New York, after being shut yesterday for Thanksgiving.

The 10-year yield dropped to 1.87 percent on Nov. 23, approaching the record low 1.67 percent set Sept. 23. It has declined five basis points this week, the most since the period ended Nov. 4.

Treasury yields may be driven lower in early 2012 by demand linked to Europe’s intensifying debt crisis before climbing later in the year as the Federal Reserve buys fewer of the securities, according to JPMorgan Chase & Co.

The firm forecasts benchmark note 10-year note yields to fall to 1.7 percent during the first three months of the year, and to rise to 2.5 percent by the end of 2012, JPMorgan analysts led by Terry Belton, global head of fixed-income and foreign- exchange research, wrote today in a report. Treasury issuance not purchased by the U.S. central bank may double to $1 trillion in 2012, “requiring a significant increase in buying from foreign investors.”

The difference between yields on Treasury 10-year notes and comparable German bunds widened to 29 basis points, near the most since April 2009, suggesting Germany’s status as a main refuge from Europe’s worsening sovereign-debt crisis is waning. The yield on the 10-year German bund climbed to 2.26 percent, the highest since Oct. 28.

Debt Issues

European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts, German Finance Minister Wolfgang Schaeuble suggested.

There may be changes to the European Stability Mechanism, due to come into force in 2013. European leaders persuaded bondholders last month to accept a 50 percent loss on their holdings of Greek debt as part of an interim rescue effort.

Italy had to pay almost 7 percent to sell six-month bills at an auction today, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The Italian Treasury paid 6.504 percent to auction 8 billion euros ($10.6 billion) of the six-month debt, almost twice the 3.535 percent a month ago and the highest since August 1997.

“The investment community will likely continue to focus on events in Europe for the remainder of the day,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “The reality is skyrocketing borrowing costs can create significant economic problems themselves.”

Spain’s Debt

Spain is also facing surging costs. The Treasury in Madrid paid 5.11 percent on three-month notes this week, more than twice that previous sale and higher than Greece pays.

Europe’s debt crisis and the ensuing demand for safety has pushed Treasuries up 9.7 percent this year as of yesterday, set for the biggest annual gain since 2008, according to Bank of America Merrill Lynch data. German bunds returned 7 percent and Japanese bonds advanced 2 percent, the indexes show.

The difference between the yields on two- and 10-year Treasury notes was 169 basis points. It narrowed to 161 basis points on Nov. 23, the least since Oct. 6 even as the Federal Reserve and the Treasury this week sold $116 billion in notes.

The $35 billion two-year note auction on Nov. 21 produced the highest bid-to-cover ratio on record for a fixed-coupon Treasury note or bond, 4.07, while a $35 billion five-year debt sale the next day drew a record low yield for the securities of 0.937 percent. A $29 billion seven-year auction on Nov. 23 garnered a record low yield of 1.415 percent.

The Fed on Nov. 21 sold $8.531 billion of securities maturing in February 2012 through July 2012 as part of its plan to lower borrowing costs that’s become known as Operation Twist, according to the Fed Bank of New York’s website. The central bank also sold $8.63 billion in Treasuries maturing from March 2014 to November 2014, in a second operation that day.

A Bloomberg survey of banks and securities companies projects the yield on the 10-year Treasury note will climb to 2.1 percent by year-end, with the most recent forecasts given the heaviest weightings.

--With assistance from John Detrixhe in New York. Editors: Paul Cox, Kenneth Pringle

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

To contact the editor responsible for this story: Robert Burgess at

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