Bloomberg News

Treasury Notes Fluctuate Amid Europe Concern, Stronger U.S. Data

December 15, 2011

Dec. 15 (Bloomberg) -- Treasury notes fluctuated, with 10- year yields touching a two-month low, amid concern that Europe’s debt crisis is worsening and data that showed U.S. employment and manufacturing improved.

Benchmark 10-year notes erased losses earlier as International Monetary Fund Managing Director Christine Lagarde said the European crisis is escalating to the point that it won’t be solved by one group of countries. The U.S. sold $12 billion of inflation-linked debt at a record low yield and plans to auction $99 billion of notes next week.

“The situation in Europe isn’t that great, which has kept a bid in the Treasury market,” said Sean Murphy, a Treasury trader at Societe Generale in New York, one of the 21 primary dealers that trade with the Federal Reserve. “U.S. data isn’t mattering much right now, even though it’s been better.”

Ten-year note yields rose one basis point, or 0.01 percentage point, to 1.91 percent at 3:11 p.m. in New York. The price of the 2 percent security due in November 2021 slipped 3/32, or 94 cents per per $1,000 face amount, to 100 25/32. The yields fell earlier to 1.86 percent, the least since Oct. 5, before increasing to as high as 1.94 percent. Five-year yields were little changed at 0.85 percent.

Thirty-year bonds resumed a decline. Long-bond yields advanced two basis points to 2.93 percent after rising earlier to as high as 2.95 percent and falling to 2.85 percent.

The euro gained 0.2 percent to $1.3013 after rising earlier to $1.3050. It fell below $1.30 yesterday for the first time in 11 months on concern European leaders will struggle to resolve debt turmoil. The Standard & Poor’s 500 Index was up 0.4 percent after earlier climbing as much as 1.1 percent.

Jobless Claims

Treasuries fell earlier after Labor Department figures showed U.S. initial jobless claims dropped by 19,000 to 366,000 in the week ended Dec. 10. The median forecast in a Bloomberg News survey projected an increase to 390,000.

The Federal Reserve Bank of New York’s general economic Index, a gauge of manufacturing, rose to 9.5, from 0.6 in November. Economists in another Bloomberg survey projected it would rise to 3. Readings higher than zero signal expansion.

“The data continues to get stronger,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the Fed. “There are not too many points of weakness.”

No Economy Immune

The IMF’s Lagarde said that if countries don’t work together, the world will face a situation similar to the 1930s, before the world slid into World War II.

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies, that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do,” she said in Washington at a program for women in public service.

Treasury notes remained little changed after the government’s auction of $12 billion of five-year Treasury Inflation Protected Securities drew a record low yield of negative 0.877 percent. It was the fourth straight auction that drew a negative yield.

Holders of TIPS receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than the interest paid to a holder of conventional debt.

The fixed payment on five-year TIPS, known as the real yield, was pushed below zero because the rise in the CPI was greater than the yield on regular five-year U.S. notes.

Record Indirect Bid

Today’s sale had a bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, of 3.01 percent, versus an average of 2.57 at the past 10 auctions of the maturity. Indirect bidders, a class that includes foreign central banks, bought 48.8 percent of the notes, a record high.

The auction capped the sale of $78 billion in notes, bonds and inflation-linked debt this week. The government sold $13 billion in 30-year bonds yesterday at a record low auction yield of 2.925 percent and a bid-to-cover ratio of 3.05, the highest since August 2000. Auctions of 10- and three-year notes also drew stronger-than-average demand as investors sought refuge.

The Treasury said it will sell next week $35 billion of two-year notes, the same amount of five-year debt and $29 billion of seven-year securities. The amounts were unchanged from the last auctions of the notes in November.

Michael Platt, the founder of the $30 billion hedge fund BlueCrest Capital Management LLP, said most of the banks in Europe are insolvent and the situation will worsen in 2012 as the region’s debt crisis accelerates.

Treasuries, Bunds

BlueCrest is pouring money into U.S. Treasuries and short- term German debt because of concern about market volatility and counterparty risk, Platt said in an interview on Bloomberg Television today. BlueCrest Capital International, the fund he manages in Geneva, has risen about 5.6 percent in 2011.

Global demand for U.S. financial assets rose in October even as China decreased its holdings, the Treasury Department reported today. Net buying of long-term equities, notes and bonds totaled $4.8 billion compared with net purchases of $68.3 billion in September, data showed.

Foreign holdings of Treasuries declined by $3.9 billion to $4.66 trillion, leaving the increase in 2011 through October at 5 percent, the smallest advance since a 1 percent rise for the same period in 2006.

China, the largest foreign lender to the U.S., cut its Treasuries holdings in October by 1.2 percent to $1.13 trillion, Treasury data show. Japan, the second-largest foreign lender, boosted its stake in Treasuries by 2.3 percent to $979 billion.

--With assistance from Daniel Kruger in New York. Editors: Greg Storey, Dennis Fitzgerald

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

To contact the editor responsible for this story: Dave Liedtka at

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