Treasury Notes Gain on Speculation Irish Sovereign-Debt Crisis Deepening

Treasury notes rose, with seven- year securities leading the advance, as concern the sovereign- debt crisis is deepening in Ireland encouraged demand for the safety of government securities.

The debt was supported as a report showed an unexpected drop in America’s consumer confidence to a one-year low. John Gormley, leader of Ireland’s Green Party and a member of the ruling coalition, said in an interview with Dublin’s RTE Radio that the country’s bond spreads would widen if Ireland considered renegotiating with bondholders of nationalized Anglo Irish Bank Corp., as suggested by the opposition.

“The market is still very sensitive to anything that is reflective of increases in systemic risk,” said Christian Cooper, senior rates trader in New York at Jefferies Group Inc., one of the 18 primary dealers that trade directly with the Federal Reserve. “It’s out of left field.”

The seven-year note yield fell 3 basis points, or 0.03 percentage point, to 2.13 percent at 4:11 p.m. in New York, according to BGCantor Market Data. The price of the 1.875 percent security maturing in August 2017 gained 5/32, or $1.56 per $1,000 face amount, to 98 3/8.

The benchmark 10-year Treasury note yield slid 1 basis point to 2.75 percent and had a weekly drop of 5 basis points in its first five-day decrease since Aug. 20. It touched 2.85 percent on Sept. 13, the highest level since Aug. 6.

Two-Year Note

The 2-year note yield slid 1 basis point to 0.46 percent, compared with the record low of 0.45 percent reached on Aug. 24. It had a weekly decrease of 10 basis points, the biggest since May 7. The 30-year bond yield dropped 2 basis points to 3.91 percent and was up 4 basis points for the week. It touched 3.96 percent yesterday, the highest level since Aug. 13.

Treasuries remained higher after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly dropped to 66.6 in September from 68.9 in the previous month. The median forecast of 65 economists in a Bloomberg News survey was for an increase to 70.

A gauge of consumer prices excluding food and energy was unchanged in August after a 0.1 percent increase in the previous month. Consumer prices including those volatile items rose 0.3 percent for a second month.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a measure of expectations for consumer prices over the life of the maturity known as the break-even rate, narrowed to 1.8 percentage points. The five- year average is 2.1 percentage points.

‘Soft’ Inflation Data

“The soft set of inflation data is supporting the Treasury market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The trend is a bit higher and a reversal of what we’ve seen.”

Longer-term U.S. debt dropped yesterday after the Labor Department reported that producer prices climbed more than economists forecast, rising 0.4 percent in August after gaining 0.2 percent in the previous month. Inflation erodes the value of fixed-income securities.

The extra yield investors demand to hold 10-year Irish debt compared with benchmark German bunds and the cost of protecting Irish government debt from default increased to a record.

Ireland’s government may need external assistance if there are additional financial-sector losses or the economy worsens, Antonio Garcia Pascual and Piero Ghezzi, economists in London at Barclays Plc, wrote in a note yesterday.

“At this juncture,” given the comfortable near-term liquidity position of the Irish treasury, there isn’t a need to draw on financial assistance, they wrote.

Ireland’s Stance

Finance Minister Brian Lenihan said the government isn’t facing difficulty raising funds and that the increase in the country’s sovereign-bond yields this week is “normal” before a debt auction.

Ireland has already pumped 22.9 billion euros ($30 billlion) into Anglo Irish, which was nationalized in January 2009. Standard & Poor’s has said the cost may eventually rise to 35 billion euros, a figure the bank has disputed.

“There’s a bank issue there that isn’t going away,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, a primary dealer.

Two-year notes outperformed longer securities this week as traders speculated that the Bank of Japan will use dollars acquired in its yen sales to buy the safest Treasuries. Japan intervened to weaken the yen two days ago for the first time since 2004 as the currency’s surge to a 15-year high versus the dollar imperiled the Asian nation’s export-led recovery.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

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