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Treasuries Rally as Merkel, Sarkozy Reject Euro Bond Issuance

August 16, 2011

Aug. 16 (Bloomberg) -- Treasuries gained as French and German leaders dismissed calls for the issuance of euro bonds that would allow borrowing on behalf of all 17 euro states, encouraging demand for a refuge in U.S. debt.

The 30-year bond rose almost two points as France’s President Nicolas Sarkozy and Germany’s Chancellor Angela Merkel avoided a U.S.-style fiscal union in favor of closer euro-area economic integration with tougher deficit rules and a regional financial transactions tax. Fitch Ratings affirmed the U.S. AAA credit rating and said the outlook is stable.

“The market was hoping for more,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It’s not that the euro bond is the cure-all for their issues, but the market is telling you it was hoping there would have been more of an urgency to attack the crisis.”

Yields on benchmark 10-year notes dropped nine basis points, or 0.09 percentage point, to 2.22 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 gained 3/4, or $7.50 per $1,000 face amount, to 99 5/32.

The 10-year note yields touched 2.20 percent, the lowest level since Aug. 11. The gain in 30-year bonds pushed yields down as much as 13 basis points to 3.64 percent. Yields on two- year notes were little changed at 0.18 percent.

Drop in Stocks

The Standard & Poor’s 500 Index decreased 1 percent after its biggest three-day rally since 2009. Crude oil for September delivery slid 0.8 percent to $86.16 a barrel.

Bonds were supported after the Federal Reserve acquired $2.909 billion of U.S. securities maturing from September 2015 to January 2017 under its policy of reinvesting proceeds of maturing assets.

Atlanta Fed President Dennis Lockhart said yesterday in Florence, Alabama, that the central bank may purchase more Treasuries or alter its balance sheet if the U.S. economy were to slow further. Fed Chairman Ben S. Bernanke may announce policy intentions at a conference in Jackson Hole, Wyoming, on Aug. 26.

“We are still expecting a rather sluggish economy and advise buying Treasuries on any backup in yield,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed. “Treasuries should rally another 30 basis points by the end of September as we should see 2 percent yields on the 10- year note.”

Fed’s Target Rate

The central bank took the unprecedented step on Aug. 9 of saying it will keep its target rate for overnight lending between banks at almost zero at least through the middle of 2013 to support the economy.

Ten-year yields slid to a record 2.0346 percent that day, while yields on two-year notes dropped to 0.1568 percent, the least ever. Yields on 10-year notes have traded between today’s low of 2.20 percent and a high of 2.33 percent Aug. 12.

“The market is finding itself in a tight range before Jackson Hole,” said Sean Murphy, a trader in New York at Societe General, a primary dealer.

The spread between yields on two-year notes and Treasury Inflation Protected Securities, a gauge of trader expectation for consumer prices over the life of the debt known as the break-even rate, shrank yesterday to 91 basis points, the narrowest in eight months. It was 95 basis points today.

Consumer Prices

The U.S. consumer price index climbed 0.2 percent in July after a 0.2 percent decrease in the prior month, according to the median forecast of 84 economists in a Bloomberg News survey before a report from the Labor Department on Aug. 18.

Fitch Ratings affirmed its AAA credit rating for the U.S. and said the outlook is stable, citing the nation’s central role in the global financial system and the flexible, diverse economy.

The company had put the rating under review after lawmakers reached a compromise Aug. 2 on a debt-limit agreement that prevented a U.S. default.

The U.S. may be placed on negative outlook should its debt levels rise more than projected, indicating more than a 50 percent probability that the nation will be downgraded in the next two years, Fitch said today in a statement.

S&P on Aug. 5 cut its U.S. credit rating to AA+ from AAA, saying lawmakers failed to cut spending enough to reduce record deficits. Moody’s Investors Service affirmed its top U.S. ranking last week.

‘Verifiable Commitment’

Merkel and Sarkozy set out joint proposals to strengthen the euro including plans for all euro-area states to demonstrate a “verifiable commitment” to anchoring debt limits in national law and a “euro council” to be headed by European Union President Herman van Rompuy. They rejected expanding the 440 billion-euro ($633 billion) rescue fund.

The European debt crisis that began in Greece in late 2009 has triggered 365 billion euros in emergency bailout loans, exposed cracks in the euro’s architecture and rattled markets around the world.

Treasuries rose earlier today after a report showed European economic growth slowed in the second quarter as Germany’s recovery almost ground to a halt.

“There are still concerns in Europe, slow global growth and no inflation on the horizon, which is keeping longer-end Treasuries well-bid,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “We are in a buy-the-dip market.”

--With assistance from Emma Charlton in London, Kristine Aquino in Singapore and Masahiro Hidaka in Tokyo. Editors: Dennis Fitzgerald, Greg Storey

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

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

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