Bloomberg News

Treasuries Fluctuate After Leaders Meet on Europe’s Debt Crisis

January 09, 2012

Jan. 9 (Bloomberg) -- Treasuries fluctuated as skepticism remained that Europe’s debt crisis will be resolved after leaders of Germany and France said a rulebook for closer fiscal union among the euro-area nations may be ready a month early.

The 30-year bond yield rose after earlier touching the lowest level in three days as the U.S. government prepares to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on Jan. 12. Treasuries broke a three-day losing streak on Jan. 6 after a report showed employers added 200,000 positions during December.

“We are still seeing a tug of war between the good data we saw on Friday and the ongoing risks coming out of the European problems,” said Sean Murphy, a Treasury trader in New York at Societe Generale, one of the 21 primary dealers that trade with the Federal Reserve. “There are still concerns in Europe that are causing buyers to come in on any dip in prices to the benefit of Treasuries.”

Yields on the 30-year bond rose one basis point, or 0.01 percentage point, to 3.03 percent at 5 p.m. after falling to 2.97 percent, lowest since Jan. 4. The price of the 3.125 percent security due in November 2041 fell 7/32, or $2.19 per $1,000 face amount, to 101 29/32. Yields on 10-year notes were little changed at 1.96. Yields touched 2.04 percent on Jan. 6, the highest level since Dec. 13, and increased eight basis points last week.

The Fed sold $8.74 billion of securities due from April to September 2012 as part of a program to replace $400 billion of shorter-maturity Treasuries in its holdings with longer-dated debt to cap borrowing costs and foster economic growth.

‘Good Progress’

Investors should buy Treasury 10-year notes as yields approach 2.4 percent and sell if Treasuries rally near 1.85 percent, according to William O’Donnell, head U.S. government- bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer.

“Our activist Fed will keep market rates low for a long time,” O’Donnell wrote in a note to clients. “We advocate that longer-term investors use back-ups to reload on longs.”

Treasuries fluctuated after a report that euro-area leaders may complete their new budget rulebook by Jan. 30, one month ahead of schedule, and are considering accelerating capital contributions to the bailout fund being set up this year to stem the debt crisis.

“There is a good chance that we can sign the debt brakes and everything that’s connected to it already in January, but at the latest in March, and that we’re making really good progress in negotiations,” German Chancellor Angela Merkel said at a joint press conference with French President Nicolas Sarkozy after they met in Berlin today. “Germany and France made a substantial contribution to this.”

Diverging Forecasts

Benchmark 10-year yields will climb to 2.6 percent by Dec. 31 from 1.88 percent at the end of 2011, according to the median forecast of economists and strategists in a Bloomberg News survey. Traders aren’t as optimistic, expecting an increase to 2.25 percent, based on forwards that use current trading levels to predict future rates.

The divergence shows traders see Europe’s debt crisis continuing to stoke demand for safety and containing yields even as the economy improves.

“Once you take the flight-to-quality element out, the growth outlook argues for Treasuries to be closer to 2.5 percent, and maybe as high as 3 percent,” Dominic Konstam, the global head of interest-rate research in New York at Deutsche Bank AG, said in a telephone interview on Jan. 3. “The big question is if, and how much, a European slowdown will affect the U.S.”

Record U.S. Debt

Predictions last year by both groups for a selloff proved wrong as Treasuries due in 10 years or more returned the most since 1995, even as President Barack Obama increased publicly traded debt outstanding to a record $9.88 trillion and Standard & Poor’s stripped the U.S. of its AAA rating on Aug. 5.

The U.S. added 200,000 jobs in December, surpassing the median forecast of economists, the Labor Department reported last week. The unemployment rate fell to 8.5 percent, the lowest level since February 2009.

U.S. data this week are forecast to add to evidence that the recovery of the world’s largest economy is gathering momentum.

Retail sales gained 0.3 percent in December after increasing 0.2 percent in the previous month, according to a Bloomberg News survey of economists before the Department’s report on Jan. 12.

“We had strong data, payrolls report and an extension to the tax cuts -- which should have been bearish, but they weren’t” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “A lot more people are coming around to the idea that there might be recession in the euro zone. Even though the U.S. growth is better, a slowdown in global growth isn’t good for anyone.”

--Editors: Kenneth Pringle, Greg Storey

To contact the reporter on this story: Cordell Eddings in New York at

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

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