Treasuries dropped, with two-year note yields rising the most in six months, on speculation European leaders will bolster the euro area’s most-indebted nations, reducing demand for safety.
Irish and Portuguese bonds rallied as 10-year Treasury note yields rose the most in two months. A report showed the outlook of consumers improved in November for the first time in three months. The Federal Reserve bought $7.229 billion of Treasuries as the central bank embarked on a second round of unconventional monetary easing to reduce unemployment and avert deflation.
“The European situation is less of a concern as there have been reports of a possible rescue of Ireland, which has allowed for higher yields,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA’s BNP Paribas Securities unit, one of the 18 primary dealers required to bid at Treasury auctions.
The yield on the two-year note increased eight basis points, or 0.08 percentage point, to 0.51 percent at 5:07 p.m. in New York, according to BGCantor Market Data. The price of the 0.375 percent security maturing in October 2012 fell 5/32, or $1.56 per $1,000 face amount, to 99 24/32. The yield is up 14 basis points this week, the most since the week ended Feb. 27, 2009.
Benchmark 10-year note yields rose 14 basis points to 2.78 percent, and are up 26 basis points for the week, the most since the week ended Dec. 25, 2009. Thirty-year bond yields rose four basis points to 4.28 percent.
The yield difference between Treasury 10-year notes and 30- year bonds hovered near unprecedented levels even as it contracted to 150.7 percentage points, after touching an all- time high of 160.2 percentage points On Nov. 10. The spread has averaged 52.8 percentage points since the start of 2000.
“The spread has widened out with the Fed buying more in the 10-year sector than the 30-year bond, and inflation expectations increasing,” Prakash said. “Whether it continues to widen is a question on the market’s mind.”
European finance ministers sought to reassure investors who have driven bond yields to records in Ireland and Portugal as leaders at a G-20 summit in Seoul addressed the Irish debt crisis amid speculation the EU will need to step in with a bailout.
Officials from Germany, France, Italy, Spain and the U.K. issued a statement in South Korea saying a crisis-resolution mechanism they’re discussing that may force bondholders to share the cost of a bailout wouldn’t apply to outstanding debt.
Ireland’s Finance Ministry today said it isn’t holding talks on an application for emergency funding from the EU. Reuters reported today, citing euro-zone sources it didn’t name, that Ireland is in talks about tapping a European rescue fund and it’s very likely to get aid.
“Ireland is fully funded into the middle of 2011,” the Finance Ministry said in an e-mail today. “There is no application for emergency funding from the European Union.”
As the Irish government puts the finishing touches on a plan to find 15 billion euros ($20.5 billion) in savings, 51 percent of respondents in the latest Bloomberg Global Poll said they regard a default as likely, compared with 42 percent who say it’s unlikely. The ranks of those anticipating an Irish default have tripled since a poll in June.
The Fed acquired 16 of the 24 securities maturing from November 2014 through April 2016 that were listed for possible purchase on the Federal Reserve Bank of New York’s website. The acquisitions are part of the Fed’s plan to acquire $600 billion of Treasuries through June and reinvest maturing mortgage holdings.
“The euro concerns and continued unfamiliarity regarding QE have added to the confusion,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “It’s still a real mess trying to define where the market is going to go.”
The policy-setting Federal Open Market Committee embarked on a second round of unconventional monetary stimulus on Nov. 3 after a benchmark interest rate near zero and an earlier program to buy $1.7 trillion of securities failed to bring down an unemployment rate that’s near a 26-year high.
Confidence among U.S. consumers increased in November, according to a report from Thomson Reuters/University of Michigan.
The group’s preliminary sentiment index rose to 69.3 from a final reading of 67.7 in October. The measure averaged 88.9 in the five years to December 2007, when the last recession began. Economists forecast the measure would increase to 69, according to the median of 66 projections in a Bloomberg News survey.
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