Treasury 10-Year Yields Drop From Almost Highest in Two Weeks

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Dec. 27 (Bloomberg) -- Treasury 10-year note yields fell from almost the highest level in two weeks as concern Europe’s sovereign-debt turmoil will slow global economic growth buoyed demand for the safest assets.

America’s government-debt securities were headed for their best annual return since 2008 as Italy prepared to sell as much as 20 billion euros ($26 billion) of debt in the next two days. Yields erased their decrease briefly today after a report showed consumer confidence rose to an eight-month high.

“No one is taking any big bets given the uncertainties that remain, so we have settled around these levels,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “Markets are very illiquid.”

Yields on 10-year Treasury notes dropped one basis point, or 0.01 percentage point, to 2.01 percent at 1:49 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 increased 1/8, or $1.25 per $1,000 face amount, to 99 7/8.

The benchmark yields have fallen 127 basis points in 2011, which would be the biggest slide in three years. They advanced 18 basis points last week in the largest five-day increase since July 1 as reports indicated U.S. economic recovery. The yields touched 2.04 percent on Dec. 23, the highest since Dec. 13.

Treasury market volume slid as the year-end U.S. holidays approached late last week. About $89 billion of Treasuries changed hands on Dec. 23 through ICAP Plc, the world’s largest interdealer broker. The 2011 daily average is $288 billion.

Borrowing Authority

“The market will trade rather choppy and thin,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “There will be no breakout in either direction.”

In a sign President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits, the U.S. government received record demand for its bonds in 2011.

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H.W. Bush administration. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20, even though they pay zero interest.

While Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more have returned 25.6 percent this year, larger than the broader Treasuries market, which has returned 8.9 percent, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index has increased 0.8 percent in 2011.

Borrowing Authority

The Obama administration will ask Congress to increase federal borrowing authority by $1.2 trillion as the nation approaches the debt limit set by law, according to a Treasury Department official. The White House will send the request to Congress on Dec. 30, the day the debt is projected to rise to within $100 billion of the $15.194 trillion limit, the Treasury official told reporters today on condition of anonymity.

The Budget Control Act of 2011 gives Congress 15 days to pass a joint resolution disapproving the increase in the debt limit. The president can veto such a measure.

Italy is scheduled to sell 9 billion euros ($11.8 billion) of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 notes tomorrow. The nation will auction debt due in 2014, 2018, 2021 and 2022 on the following day.

European ‘Touchstone’

“The debt auctions are going to be an interesting touchstone for the European sovereign-credit crisis,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “While we anticipate a reasonable response, the end of the year and the ongoing credit concerns will weigh on the process.”

S&P said this month it may lower the credit grades of 15 euro nations including Italy, France and Germany. The yield on Italian 10-year bonds increased three basis points to 7.01 percent today.

Although Europe has made progress in confronting debt turmoil, the region needs to speed up implementation of crisis measures, International Monetary Fund Managing Director Christine Lagarde said in an interview, Le Journal du Dimanche reported. The U.S. is already being affected, she said.

Investors in a weekly survey by Ried Thunberg ICAP, a unit of ICAP, remained bearish on Treasuries, the company said. Ried’s index on the outlook on the market through March was 47 for the seven days ended Dec. 23 versus 49 the week before. A figure below 50 shows investors expect rates to increase.

U.S. Confidence

The Conference Board’s consumer-confidence index rose this month to 64.5, exceeding all estimates in a Bloomberg News survey and the highest since April, from a revised 55.2 reading in November, figures from the New York-based private research group showed today. The measure averaged 53.7 during the recession that ended in June 2009.

The difference between U.S. 10-year yields on conventional and inflation-linked Treasuries, a gauge of the inflation outlook for the period known as the break-even rate, touched 2.15 percentage points, the widest spread since Nov. 14.

http://www.businessweek.com/news/2011-12-27/treasury-10-year-yields-drop-from-almost-highest-in-two-weeks.html