Bloomberg News

Treasuries Advance as Greece Investors Yet to Agree on Debt Deal

January 23, 2012

Jan. 23 (Bloomberg) -- Treasuries rose, snapping a three- day decline, as investors sought safer assets with Greece and its private creditors struggling to reach agreement on the terms of a debt-swap deal.

Long-maturity bonds led gains after Charles Dallara, who’s representing private creditors, said bondholders negotiating a debt swap with Greece have made their “maximum” offer, leaving it to the European Union and International Monetary Fund to decide whether to accept the deal. Treasuries also advanced before the Federal Reserve starts a two-day meeting tomorrow after which it will provide forecasts for the benchmark interest rate for the first time.

“The safe-haven bid for Treasuries has returned, albeit mildly, as the Greek private-sector involvement talks failed to reach agreement this weekend,” said Peter Chatwell, a fixed- income strategist at Credit Agricole Corporate & Investment Bank in London. “We now have to deal with the uncertainty over the agreement itself, and the possibility that even with agreement with the Institute of International Finance, other creditors may still be unwilling to participate.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 2.01 percent at 9:46 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 rose 5/32, or $1.56 per $1,000 face amount, to 99 29/32. The 30-year yield dropped one basis point to 3.09 percent.

The two-year yield was little changed at 0.23 percent before the U.S. auctions the maturity tomorrow. Financial markets in Asian nations such as China, Hong Kong, Singapore, and South Korea are shut today the Lunar New Year holiday.

Greece Deal

Dallara, managing director of the Washington-based IIF, told Athens-based Antenna TV that he’s hopeful the EU and IMF will agree to terms for private investor involvement in a rescue of Greece. He declined to elaborate on the terms discussed in talks that resumed Jan. 18 and remained inconclusive as EU finance ministers prepared to meet in Brussels today.

“The important issue is how many investors will be participating in an agreement” with Greece, said Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest bank. “The flight to quality into Treasuries will not fade.”

Treasury 10-year yields may remain in a range from 1.7 percent to 2.1 percent, said Shimomura, adding that investors should consider buying bonds while yields are near 2 percent.

The Fed last week released blank templates showing the format of its forecasts for the benchmark rate, which will be provided to the public for the first time on Jan. 25. It will offer two charts along with the forecasts, according to a statement released on Jan. 20.

Fed Forecasts

The difference between two- and 10-year yields was 1.77 percentage points today after widening to as much as 1.79 percentage points on Jan. 20, the most since Dec. 13.

“We expect the steepening to continue,” Anshul Pradhan and Vivek Shukla, strategists at Barclays Plc, wrote in a note to clients dated Jan. 20. “There is still scope for fed fund expectations for the next few years to be revised lower.”

The Federal Open Market Committee left its target for overnight loans between banks in a range of zero to 0.25 percent last month and reiterated that economic conditions may warrant “exceptionally low” rates “at least” through mid-2013.

Operation Twist

The Fed is seeking to keep longer-term borrowing costs capped by selling $400 billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.

The central bank is scheduled to buy as much as $2 billion of Treasuries due from 2022 to 2031 today as part of the program, according to the New York Fed’s website.

The Treasury will sell $99 billion of notes this week starting with $35 billion of two-year securities tomorrow, $35 billion in five-year debt the following day, and $29 billion of seven-year notes on Jan. 26.

The two-year notes yielded 0.24 percent in pre-auction trading, in line with 0.24 percent at the previous sale Dec. 19, the lowest since August. Investors bid for 3.45 times the amount on offer last month, down from 4.07 times in November.

Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Barack Obama was George W. Bush in 2004.

--With assistance from John Detrixhe in New York. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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