Bloomberg News

Treasuries Pare Drop as Concern Remains After European Agreement

December 12, 2011

Dec. 9 (Bloomberg) -- Treasuries pared their decrease as sovereign-debt concern remained as European leaders agreed to tighten budget rules and speed the start of a rescue fund.

The cost for European banks to borrow in dollars rose on speculation the measures agreed upon today by euro-area leaders during a two-day summit in Brussels won’t be enough to stem the region’s sovereign-debt crisis.

“There is some skepticism regarding the agreement in Europe, and that’s why yields aren’t going very far,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

Yields on 10-year notes advanced less than one basis point, or 0.01 percentage point, to 1.98 percent at 9:03 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities due in November 2021 fell 2/32, or 63 cents per $1,000 face amount, to 100 5/32. The yields earlier increased five basis points to 2.02 percent.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened nine basis points, or 0.09 percentage point, to 126 basis points below the euro interbank offered rate. That’s the most expensive rate since Dec. 2.

Nineteen months since euro leaders forged their first plan to contain debt turmoil, a fifth comprehensive effort added 200 billion euros ($267 billion) to the war chest and tightened rules to curb future debts. They sped the start of a 500 billion-euro rescue fund to next year and dropped a proposal that bondholders shoulder losses in rescues.

Gain in Treasuries

Demand for U.S. debt as a result of Europe’s crisis pushed a gauge of 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.

The U.S. will auction $32 billion of three-year notes on Dec. 12, $21 billion of 10-year debt the next day and $13 billion in 30-year bonds on Dec. 14, the U.S. Treasury Department said yesterday. The government will also sell $12 billion of five-year Treasury Inflation Protected Securities on Dec. 15.

The Federal Reserve is replacing $400 billion of shorter maturities in its holdings of Treasuries with longer-term debt to cap borrowing costs in a plan it announced in September. It’s scheduled to buy as much as $2.75 billion of securities due from 2036 to 2041 today as part of the program, according to the New York Fed’s website.

Economic View

The threat of slowing economic growth will maintain demand for U.S. securities, said Hans Goetti, the Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which oversees the equivalent of $1.5 billion in global assets.

“The U.S. economy has strengthened a bit lately, but it’s still not where it should be,” he said. “Bonds still make a lot of sense.” Ten-year yields may fall to less than 1.5 percent next year, Goetti said.

The trade deficit narrowed in October to the lowest level of the year, reflecting a drop in imports that will help give the U.S. economy a lift.

The gap shrank 1.6 percent to $43.5 billion, smaller than projected, from $44.2 billion in September, Commerce Department figures showed today. Purchases from overseas fell to the lowest level since April, due almost entirely to a plunge in demand for petroleum.

The Thomson Reuters/University of Michigan index of consumer sentiment rose to 65.8 in December from 64.1 in the prior month, according to a Bloomberg News survey before today’s report. Fewer Americans filed applications for jobless benefits last week, the Labor Department said yesterday.

Ten-year note yields in the U.S. will climb to 2.42 percent by the middle of next year, according to the average forecast in a Bloomberg News survey of analysts, with the most recent forecasts given the heaviest weightings.

--With assistance from Namitha Jagadeesh in London. Editors: Dennis Fitzgerald

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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


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