Bloomberg News

Treasuries Snap Gain Before Auction Announcement, Jobless Claims

December 09, 2011

Dec. 8 (Bloomberg) -- Treasuries snapped the biggest gain in almost a month before the U.S. announces the size of four debt auctions next week and as European officials meet in Brussels to address the region’s debt crisis.

The extra yield investors demand to hold 10-year German bunds instead of same-maturity U.S. notes narrowed before a European Central Bank meeting at which policy makers are forecast to cut the refinancing rate by 25 basis points. Economists forecast a report today will show fewer Americans filed claims for jobless benefits, fueling speculation the U.S. will avoid a recession.

“Fears of a double-dip are gone at the moment, and that should lead Treasury yields higher,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “If you look at the U.S. on its own and there was no euro-zone crisis, Treasury yields should be much higher.”

The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 2.04 percent at 6:45 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 declined 3/32, or 94 cents per $1,000 face amount, to 99 19/32.

The yield fell six basis points yesterday, the most since Nov. 9. The rate dropped to a record 1.67 percent on Sept. 23.

The U.S. will auction $32 billion in three-year notes on Dec. 12 and $21 billion in 10-year debt the next day, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance. The government will also sell $13 billion in 30-year bonds on Dec. 14 and $12 billion in five-year Treasury Inflation Protected Securities on Dec. 15, Wrightson predicts.

European Summit

European leaders begin a two-day summit in Brussels today after the region’s debt crisis spread to Italy last month, pushing yields on the nation’s debt to a euro-era record.

The ECB will cut its benchmark rate by a quarter-percentage point to 1 percent today, according to 53 of 58 economists in a Bloomberg News survey. The ECB may also give banks greater access to cash, said three euro-area officials with knowledge of the deliberations.

Demand for U.S. debt amid Europe’s crisis pushed Treasuries due in 10 years or longer up 21 percent in the past six months, the best performance among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies after accounting for currency changes.

Spread Narrows

The extra yield investors get for holding 10-year bunds instead of similar-maturity U.S. paper shrank one basis point to six basis points. The spread was 34 basis points on Nov. 29, the most since April 2009.

“Uncertainty over the outcome of today’s ECB meeting and EU summit is keeping many investors nervous and markets choppy,” Nick Stamenkovic, a fixed-income strategist at brokerage RIA Capital Markets Ltd. in Edinburgh, wrote today in a note to clients.

The Federal Reserve is replacing $400 billion of shorter- maturity Treasuries in 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 $8.75 billion of notes maturing in 2012 and buy as much as $5 billion of securities due from 2020 to 2021 today as part of the program, according to the New York Fed’s website.

Rating Concern

Treasuries rose yesterday after Standard & Poor’s said the European Union may lose its top credit rating and amid speculation European governments will end up cutting spending so much that it will slow global economic growth.

The EU’s AAA long-term grade and the rankings 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.

Yields may climb through the first quarter of 2012 as Europe tackles its debt crisis and then fall when spending cuts set in, according to Barclays Plc, one of the 21 primary dealers that trade directly with the Fed.

Ten-year rates may increase to 2.25 percent before declining to 2 percent, according to a report by Barclays strategists Anshul Pradhan and Vivek Shukla.

“As the year unfolds, investors should turn their attention to the significant fiscal austerity coming down the pipeline,” the strategists wrote in the report yesterday. “Any selloff is unlikely to be sustained.”

The 10-year rate will rise to 2.73 percent by the end of 2012, according to a composite forecast based on the responses of banks and securities companies with the most recent forecasts given the heaviest weightings.

The number of Americans claiming unemployment benefits for the first time fell to 395,000 last week from 402,000, according to economists surveyed by Bloomberg before the government report today. A Thomson Reuters/University of Michigan index of consumer sentiment rose to 65.8 in December from 64.1 in November, a separate survey showed ahead of the data tomorrow.

--Editors: Nicholas Reynolds, Dennis Fitzgerald

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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