Bloomberg News

Treasuries Tumble as Bond Gains in Europe Boost Risk Appetite

December 20, 2011

Dec. 20 (Bloomberg) -- Treasuries fell, snapping a two-day advance, as gains in Spanish and Italian government bonds and an increase in German business confidence eased concern Europe’s debt crisis is worsening, damping demand for refuge.

Thirty-year bond yields climbed from an 11-week low as data showed builders in the U.S. broke ground in November on the most houses in a year, adding to signs the world’s largest economy is strengthening. The U.S. will sell $35 billion of five-year securities today in the second of three note offerings this week totaling $99 billion.

“The information out of Europe is good, and it led people to think risk is on for today,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed.

Yields on 30-year bonds surged 12 basis points, or 0.12 percentage point, to 2.91 percent at 11:38 a.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.78 percent yesterday, the lowest level since Oct. 4. The 3.125 percent securities due in November 2041 dropped 2 15/32, or $24.69 per $1,000 face amount, to 14 3/8. Benchmark 10-year note yields gained nine basis points to 1.90 percent.

The 10-year yield has fallen 140 basis points in 2011, set for the biggest annual decline since 2008. It tumbled to a record 1.67 percent on Sept. 23.

German Confidence

Treasuries declined as German business confidence data unexpectedly rose in December, damping bets that Europe’s two- year-old debt crisis is weighing on growth. The Ifo institute’s business climate index rose to 107.2 from 106.6 in November, the Munich-based group said. Economists in a Bloomberg survey forecast a drop to 106.

Spanish 10-year yields touched a two-month low of 5.06 percent, down from 6.78 percent on Nov. 17, as the European Central Bank offered unlimited three-year loans to the region’s banks. Spain sold 5.64 billion euros ($7.4 billion) of the three- and six-month bills, exceeding its maximum target of 4.5 billion euros. Italian two-year note yields fell for a fourth day and reached 4.91 percent, the lowest since Oct. 31.

The ECB’s three-year loan operation, announced by bank President Mario Draghi on Dec. 8, begins today and the results will be announced tomorrow.

“Even though the European authorities haven’t addressed the core issue of solvency, the liquidity measures are starting to gain traction at least in the mindset of the investing public,” said RBS’s O’Donnell.

U.S. Housing

U.S. housing starts increased 9.3 percent to a 685,000 annual rate, the highest level since April 2010, Commerce Department figures showed today in Washington. Building permits, a proxy for future construction, also climbed to a more than one-year high.

The Standard & Poor’s 500 Index climbed 2.1 percent, and the Stoxx Europe 600 Index advanced 1.2 percent. The euro strengthened 0.9 percent to $1.3118.

The difference in yield between 10-year Treasuries and inflation-protected debt, a measure of the outlook for consumer prices over the term of the debt known as the break-even rate, increased to as much as 2.0 percent, the widest since Dec. 14.

The Standard & Poor’s 500 Index climbed 2.6 percent, and the euro strengthened 0.9 percent to $1.31018.

Ease in Pressure

“The Treasury market is trading lower this morning as investors react to stronger-than-expected economic data” as well as the Spanish auction, Kevin Giddis, president of fixed- income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “We are still a long way from a fix to Europe’s problems, but any ease in funding pressures among member economies is certainly a welcomed development.”

Fed Bank of Minneapolis President Narayana Kocherlakota said he’s grown more optimistic about the economy after recent data. He spoke in an interview on CNBC Television.

Richmond Fed President Jeffrey Lacker predicted the U.S. economy will grow at least 2 percent next year and inflation is likely to meet central bank goals.

“I am hard-pressed to see the rationale for any further monetary stimulus,” Lacker told reporters yesterday. “Recent economic news in the U.S. has been positive for a couple months now.”

The Fed purchased $2.512 billion of Treasuries today due from February 2036 to May 2041 as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs and support the economy.

Most Since 2008

Treasury 10-year notes have returned 17.7 percent this year, headed for the biggest annual gain since 2008, according to Bank of America Merrill Lynch indexes. The overall Treasury market has gained 10.1 percent, also headed for its biggest annual return since 2008.

The extra yield investors demand to hold 10-year notes instead of five-years dropped to 100 basis points yesterday, the least since Oct. 10. The spread was at 105 basis points today.

Five-year debt being sold today yielded 0.883 percent in pre-auction trading, below the record low yield of 0.937 percent at the last auction of the notes on Nov. 22.

The Treasury sold $35 billion of two-year notes yesterday at a yield of 0.24 percent, the lowest since August. The U.S. will sell $29 billion of seven-year securities tomorrow.

Today’s auction “will definitively be a test for the market even as auctions over the past few weeks have been extremely strong and there has been a clear underlying bid in Treasuries,” Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald LP in New York, wrote in a client note. “We look for the concession to continue to be built in prior to 1 p.m., with many still extremely cautious in their bids.”

--With assistance from Lucy Meakin in London. Editors: Greg Storey, Paul Cox

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

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

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