Bloomberg News

Treasuries Gain After EU Summit Fails to Quell European Concern

December 13, 2011

Dec. 12 (Bloomberg) -- Treasuries rose after Moody’s Investors Service said it will review ratings for all European Union countries, citing a failure to produce “decisive” measures to end the region’s debt crisis at a summit last week.

Longer-term U.S. debt gained following two weeks of decreases as Germany’s top central banker damped speculation the European Central Bank will extend its role to help end the region’s two-year debt crisis. U.S. auctions of notes, bonds and inflation-linked debt over the next two weeks will probably total $177 billion, the largest concentration of duration supply ever, according to JPMorgan Chase & Co.

“It’s still very much a crisis,” said David Ader, head of government-bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “There’s a bit of a statement in the wake of the EU summit. People are saying, ‘Where’s the beef?’ There really isn’t that much there. Treasuries are getting a bid on the back of that.”

Yields on 30-year bonds fell five basis points, or 0.05 percentage point, to 3.05 percent at 8:47 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 increased 1 1/32, or $10.31 per $1,000 face amount, to 101 3/8. The yields climbed eight basis points last week and 11 basis points the week before that.

Ten-year note yields decreased five basis points to 2.01 percent, compared with the record low of 1.67 percent set on Sept. 23.

Onus on Governments

Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Sonntagszeitung that while a European agreement on Dec. 9 to limit budget deficits represents “progress,” the onus is on governments rather than the ECB to resolve the crisis with financial backing. The interview was published yesterday.

The summit accord is “insufficient,” Mohamed El-Erian, who is Pacific Investment Management Co.’s co-chief investment officer along with Bill Gross, said in an interview with the French newspaper Les Echos.

Government and Treasury debt as a percentage of Pimco’s $241 billion Total Return Fund climbed to 23 percent in November from 19 percent in the previous month, according to figures posted on Newport Beach, California-based Pimco’s website. Mortgage securities, the fund’s largest holdings, increased to 43 percent from 38 percent in October.

U.S. Debt Returns

U.S. government debt has returned 8.9 percent this year, including reinvested interest, Bank of America Merrill Lynch indexes show. That compares with the 1.8 percent return on the Standard & Poor’s 500 Index when dividends are included.

The rally in Treasuries has accelerated since October even as reports showed improvements in everything from consumer confidence to jobless claims to manufacturing.

While government debt usually suffers as a strengthening economy spurs inflation and encourages investors to take bigger risks with their money, this recovery has been different because Europe’s sovereign-debt crisis has elevated the stress in the global financial system, bolstering demand for safety.

This week’s U.S. debt sales will consist of $78 billion in notes, bonds and inflation-linked debt in auctions starting today with $32 billion of three-year notes. The Treasury will announce on Dec. 15 how much it plans to raise in three note offerings starting Dec. 19.

“The only other time in recent memory that the Treasury held six nominal auctions in consecutive weeks was in April/May 2009, when the market priced in a significant supply concession,” wrote Terry Belton, head of U.S. debt strategy at JPMorgan, in a report Dec. 9.

Duration Supply

Duration supply, based on weighting Treasury securities by their sensitivity to changes in yield, increases as the U.S. sells more long-term debt. The sales planned through Dec. 21 are equivalent to issuing $114 billion of 10-year notes using this measure, according to JPMorgan. The firm is one of the 21 primary dealers obliged to participate in auctions.

“The U.S. looks considerably safer than Europe, so we could get a decent amount of support from that type of investor,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The next headline out of Europe could change everything. That’s how quickly and fluid the situation is. Investor sentiment changes on a dime.”

The Federal Reserve’s $400 billion program to replace shorter-term debt will reduce rates on longer-dated government debt, the Bank for International Settlements said.

Yields on U.S. Treasuries with more than eight years to maturity may decrease about 22 basis points, Jack Meaning and Feng Zhu wrote in the Basel-based BIS’s quarterly report.

Purchase Today

The Fed is replacing the shorter maturities with longer- term debt to cap borrowing costs in a plan it announced in September. It’s scheduled to buy as much as $1.5 billion of Treasury Inflation Protected Securities due from 2018 to 2041 today as part of the program.

Additional stimulus “remains on the table,” Fed Chairman Ben S. Bernanke said at a news conference after the Fed’s Nov. 2 meeting. He declined to specify conditions that would prompt a move. The Federal Open Market Committee holds its December policy meeting tomorrow.

--With assistance from Wes Goodman in Singapore, Daniel Kruger and Liz Capo McCormick in New York. Editors: Greg Storey, Kenneth Pringle

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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


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