Bloomberg News

U.S. 10-Year Yield Trades Close to Two-Week High on Europe Talks

November 23, 2012

Treasuries fell, pushing 10-year note yields close to two-week highs, as concern ebbed that Europe’s leaders will fail to contain region’s three-year debt crisis, reducing haven demand.

U.S. 10-year yields rose the most on a weekly basis since September as finance ministers from the euro area prepare to hold a meeting on Nov. 26 to discuss unlocking bailout funds for Greece, after failing to reach an agreement earlier this week. The U.S. will sell $99 billion in notes next week.

“We are just going to stay range-bound, barring what goes on in Europe,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed.

The 10-year note yield rose one basis point, or 0.01 percentage point, to 1.69 percent as of 1:59 p.m. in New York. The price of the 1.625 percent security maturing in November 2022 fell 3/32, or 94 cents per $1,000 of face value, to 99 13/32, according to Bloomberg Bond Trader prices.

The yield rose earlier today to 1.70 percent, the most since Nov. 7. It rose 11 basis points this week, the most since Sept. 14.

Trading of U.S. government bonds closed at 2 p.m. in New York after it was shut yesterday for Thanksgiving.

Less Expense

Treasuries traded at the least expensive levels in more than two weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.87 percent, the least costly since Nov. 6. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.

Treasury trading volume dropped to $163 billion on Nov. 21, compared with the 2012 daily average of $241 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The figure was down from $242 billion the previous day.

The U.S. government is scheduled to auction $35 billion of two-year notes on Nov. 27. The Treasury will offer the same amount of five-year securities on Nov. 28 and $29 billion of seven-year debt the following day.

Spain’s Debt

Spain’s government bonds trimmed a weekly advance after S&P said the economic risks for the nation’s banks have increased amid greater credit risk in lending to households, corporations and the public sector.

U.S. government securities returned investors 2.3 percent this year, Bank of America Merrill Lynch indexes show. The MSCI World Index (MXWO) of shares has risen 12 percent during the period, including reinvested dividends. Demand for the securities has been sustained as European leaders struggled to resolve the sovereign debt crisis and the U.S. approached the so-called fiscal cliff of automatic spending cuts and tax increases.

Greece is negotiating with euro-area politicians and the International Monetary Fund over the steps needed to qualify for the release of loan installments frozen since June.

“The Treasury market will be dictated to by events in Europe, given the lack of data” in the U.S. today, said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “We have some more data next week. We have the meeting on Greece and it looks increasingly likely that a compromise will be cobbled together.”

Durable Goods

The Commerce Department may say on Nov. 27 that bookings for goods meant to last at least three years fell 0.8 percent in October from the prior month, according to the median projection of economist surveyed by Bloomberg.

The housing revival still faces “significant obstacles,” and strengthening the housing recovery remains a “critical challenge” for policy makers, Fed Chairman Ben S. Bernanke said on Nov. 15. He unveiled a plan in September to buy $40 billion of mortgage debt a month in a third round of so-called quantitative easing.

The Fed currently sells shorter-term notes and buys longer- maturity bonds as part of its Operation Twist program due to expire at the end of this year. The central bank will buy as much as $2.25 billion of Treasuries maturing in February 2036 to November 2042 on Nov. 26.

Fed’s Role

“You’ve still got fairly hefty buying by the Fed going through every month taking a whole lot of stock out of the market,” said Michael Turner, a fixed-income strategist in Sydney at Royal Bank of Canada. “So, you can’t be too bearish.”

Gains by U.S. government debt securities may be limited amid optimism that politicians will find a way to avoid the so- called fiscal cliff.

The 10-year yield has rebounded since it reached a two- month low of 1.55 percent on Nov. 16 when President Barack Obama met with congressional leaders about the fiscal cliff. House Speaker John Boehner and White House Press Secretary Jay Carney both described the discussions as “constructive.”

The fiscal cliff refers to the $607 billion combination of automatic spending cuts and tax increases scheduled to take effect in January. Lawmakers are trying to avert the cliff to prevent a short-term shock to the economy and reach an agreement on long-term deficit reduction.

To contact the reporters 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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