Bloomberg News

U.S. 10-Year Yields at Almost 3-Month High Amid ECB Bets

August 20, 2012

Treasury 10-year yields traded at almost a three-month high as investor demand for safety ebbed amid speculation the European Central Bank may make progress curbing the euro bloc’s debt crisis.

The yields rose to their highest level of the day after Germany’s Der Spiegel magazine reported the ECB is considering putting a cap on area bond yields to contain the region’s fiscal turmoil. U.S. bond yields erased gains after the ECB said it hasn’t discussed a plan to target yields of euro-bloc members. The ECB meets Sept. 6. The Federal Reserve bought $4.47 billion of Treasuries today as part of a program to support the economy.

“We’re very focused on Europe,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “European speculation on what the ECB may announce at the Sept. 6 meeting is the story right now. It’s all about sentiment.”

U.S. 10-year note yields dropped less than one basis point, or 0.01 percentage point, to 1.81 percent at 5:40 p.m. in New York, according to Bloomberg Bond Trader prices. They climbed earlier to 1.857 percent after touching 1.859 percent on Aug. 16, the highest since May 11. The 1.625 percent securities maturing in August 2022 rose 1/32, or 31 cents per $1,000 face amount, to 98 11/32.

Thirty-year bond yields fell one basis point to 2.92 percent after rising earlier to 2.98 percent.

Ten-year note yields have increased 43 basis points, or 0.43 percentage point, since falling to a record 1.379 percent on July 25. They will end the year at 1.65 percent, according to the median forecast of 81 economists in a Bloomberg News survey.

August Loss

Investors in Treasuries have lost 1.5 percent in August, according to Bank of America Merrill Lynch indexes. The last time they fell as much in a full month was December 2010.

The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.739 percent today, after touching 0.705 percent on Aug. 16, the least expensive since May. The premium was negative 1.02 percent on July 24, the most costly ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The ECB may decide at its next meeting to set yield limits on the debt of European countries, Der Spiegel reported yesterday, without saying where it got the information. A plan to set a target on bond yields would involve the bank using its power to print money, the German news magazine said.

Treasuries erased losses after the bank said the matter hasn’t been discussed by policy makers. German bunds pared losses, with 10-year yields trading at 1.51 percent, up one basis point, or 0.01 percentage point, after rising to as high as 1.58 percent. Spanish 10-year bonds pared a rise, with their yields trimming a drop to 6.28 percent after earlier touching a six-week low of 6.16 percent.

‘Absolutely Misleading’

A spokesman for the ECB said in an e-mail it’s “absolutely misleading to report on decisions” that haven’t been made and individual views that haven’t been discussed by its governing council.

“As far as recent statements by government officials are concerned, it is also wrong to speculate on the shape of future ECB interventions,” the spokesman said. “Monetary policy is independent and undertaken strictly within the ECB mandate.”

Germany’s Bundesbank stepped up its criticism of the ECB’s plan to embark on potentially “unlimited” government bond buying. The purchases “entail significant stability risks,” the Frankfurt-based central bank said in its monthly report.

Demand for safety also declined earlier before U.S. reports this week that may show the recovery of the world’s biggest economy is gaining momentum.

U.S. Data

Existing home sales rose 3.2 percent in July from June, when they dropped 5.4 percent, according to a Bloomberg survey before the National Association of Realtors’ report on Aug. 22. Sales of new homes, due the next day from the Commerce Department, rose 4.3 percent, a separate survey showed. Durable- goods orders increased 2.5 percent in July, another survey said Commerce Department data will show on Aug. 24.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for the rate of inflation over the life of the securities and is known as the break-even rate, was 2.25 percentage points, little changed from Aug. 17. It touched 2.34 percentage points on Aug. 9, the highest since April.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of a stimulus strategy called quantitative easing.

The Fed is now swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs. It purchased $4.47 billion of Treasuries today due from August 2018 to August 2020.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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


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