Treasury 10-Year Yield Reaches 3 Percent as European Debt Concern Fades

Treasury 10-year note yields rose above 3 percent for the first time since July as concern eased that the European debt crisis would spread and most reports showed the U.S. economic recovery picking up steam.

Government debt maturing in three years and more fell this week as the Federal Reserve said the economy strengthened in 10 of its 12 regions, as hiring improved, manufacturing expanded and retailers anticipated stronger holiday shopping. A smaller- than-forecast gain in November payrolls pushed yields on two- year notes lower yesterday. The Treasury Department next week will sell $66 billion in notes and bonds.

“Concerns about the situation in Europe have receded some and economic data overall has been positive, which translates into higher rates,” Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 18 primary dealers that trade with the Fed. “While fundamentals have improved, there is still lots of uncertainty out there and the Fed continues to buy relentlessly, which will limit yield rises.”

Ten-year note yields rose 14 basis points to 3.01 percent, according to BGCantor Market Data after touching 3.04 percent, the highest since July 28. The price of the 2.625 percent security maturing in November 2020 fell 1 4/32, or $11.25 per $10,000 face amount, to 96 23/32. The yield on the 30-year bond rose 11 basis points to 4.31 percent while two-year note yields fell four basis points to 0.47 percent.

European Scene

European Central Bank policy makers meeting in Frankfurt Dec. 2 kept the benchmark interest rate at a record low of 1 percent. ECB President Jean-Claude Trichet said the central bank will delay its withdrawal of emergency liquidity measures to combat “acute” market tensions.

Ireland on Nov. 28 became the second country to tap European assistance, following Greece, prompting a flight to quality amid speculation that the country’s funding crisis may spread to Portugal and Spain. The Irish rescue package is worth 85 billion euros ($114 billion).

The ECB bought Irish and Portuguese government bonds Dec. 2 and yesterday, according to at least four traders with knowledge of the transactions, reducing concern that the ECB would not aggressively act to solve the crisis. The ECB also purchased Greek debt, said another person, who asked not to be identified because the deals are confidential. Trichet said the bond-buying program was ongoing.

Good Time

“The timing for these reported bond purchases is perfect,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The ECB is buying in an extremely illiquid year-end market. Its purchases are always going to move the market in a big way.”

The weekly yield increase for Treasuries came even as U.S. employers added fewer jobs in November than economists forecast and the unemployment rate unexpectedly rose.

Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 increase the prior month, Labor Department figures showed yesterday in Washington. The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated.

The Institute for Supply Management’s non-manufacturing index, which covers about 90 percent of the economy, rose to 55 last month from 54.3 in October, according to the ISM report released yesterday. The index of pending home resales gained a record 10 percent after dropping 1.8 percent in September, the National Association of Realtors said Dec. 2 in Washington.

Economic News

“The market has seen a lot of good economic news lately and the jobs report was the first to that bucked the trend of good economic data,” said Kevin Flanagan, a Purchase, New York- based chief fixed-income strategist at Morgan Stanley Smith Barney.

Goldman Sachs Group Inc. increased its forecast for U.S. gross domestic product growth next year to 2.7 percent from 2 percent. The U.S. economy will expand 3.6 percent in 2012, according to a report sent to Goldman Sachs clients on Dec. 1.

Fed policy makers on Nov. 12 started a $600 billion second round of asset purchases to support growth in the economy and to reduce unemployment and avert deflation.

The U.S. central bank bought $37.3 billion in Treasuries during the week, according to the New York Fed’s website. Next week it plans four days of purchases.

Fed Lock

Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said the Fed is unlikely to raise interest rates for several years with employment growing less than forecast.

“The front part of the curve is the safe part of the curve” with policy makers forced to keep their target rate near zero to sustain growth, Gross said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene. The difference between 2- and 10-year notes is known as the yield curve.

The extra yield investors pay to hold 10-year notes over two-year debt widened for a fourth straight day to 2.54 percentage points yesterday, the steepest yield curve since June.

The 10-year note yield will end the year at 2.64 percent, according to the average forecast in a Bloomberg News survey of 63 banks and securities companies, with the most recent estimates given the heaviest weightings. The two-year note yield is expected to end 2010 at 0.5 percent.

Next week’s government debt sales will include $32 billion of three-year notes on Dec. 7, $21 billion of 10-year securities the following day and $13 billion of 30-year bonds on Dec. 9.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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