Treasury 10-Year Yield Rises Most in 18 Months on Obama Tax Cut Extension

Treasuries tumbled, pushing the 10- year note yield up the most since June 2009, after President Barack Obama agreed to extend tax cuts for two years and the three-year note sale drew the lowest demand since February.

The price of the 30-year bond fell more than 2 points on concern Obama’s plan also includes a payroll tax cut of 2 percentage points to help support the recovery, potentially widening budget deficits. Today’s $32 billion offering of three- year securities lifted the total amount of notes and bonds auctioned by the Treasury to $2.116 trillion, topping last year’s auction record of $2.109 trillion.

“The tax cut package is a game changer,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “The tax agreement is more pro stimulus and pro growth than anyone expected going into the debate and changes the odds of a double dip. That is not what the Treasury market wants to see.”

The benchmark 10-year note yield climbed 20 basis points, or 0.20 percentage point, to 3.14 percent at 5 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 dropped 1 22/32, or $16.88 per $1,000 face amount, to 95 21/32.

The gain in the yield was the biggest since an increase of 21 basis points on June 1, 2009, when economic reports showed the recession was abating. The yield touched 3.17 percent today, the highest level since June 23, according to Bloomberg data. Two-year note yields gained 10 basis points to 0.53 percent in the biggest gain on a closing basis since March 24.

Long Bond Yields

Thirty-year bond yields rose as much as 20 basis points to 4.44 percent, the highest since May 14. The yield on the existing three-year note gained 13 basis points to 0.82 percent.

The extra yield investors demand to hold 10-year notes over 2-year debt increased to 2.61 percentage points, the biggest spread since May.

The yield on the 10-year note has increased 48 basis points since the day before the Federal Reserve began the second round of government debt purchases on Nov. 12.

“Yields had been trending higher, and today’s announcement has served as the catalyst that has been the exclamation point on the more upbeat outlook that the bond market has been romancing,” said Anthony Crescenzi, a bond strategist at Newport Beach, California-based Pacific Investment Management Co., which operates the world’s biggest bond fund.

Obama on Taxes

U.S. debt declined as Obama said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending George W. Bush’s tax cuts before Congress adjourns.

The current tax rates, enacted in 2001 and 2003, are set to expire Dec. 31. Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday.

Obama’s deal with congressional Republicans to extend tax cuts will expand the federal budget deficit and make a reduction in the issuance of Treasuries unlikely, according to Credit Suisse Group AG.

The compromise will add $148 billion to the shortfall, pushing it to $1.34 trillion for fiscal 2011, Credit Suisse strategists Scott Sherman, Ira Jersey and Jay Feldman, all based in New York, wrote in a report to clients today. The forecast is near the $1.42 trillion and $1.29 trillion deficits in the 2009 and 2010 fiscal years.

Three-Year Auction

At today’s three-year note auction, the securities drew a yield of 0.862 percent, compared with the average forecast of 0.841 percent in a Bloomberg News survey of 6 of the 18 primary dealers. The last sale of three-year notes, on Nov. 8, drew a yield of 0.575 percent.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.91, the lowest level since February, when it was 2.83.

The U.S. will auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on Dec. 9 for a total of $66 billion this week.

“‘We will probably see even more concession heading into the 10-year auction,” said John Briggs, a U.S. government bond strategist in Stamford, Connecticut, at Royal Bank of Scotland Plc, which as a primary dealer is obliged to participate in government auctions.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, widened to 2.25 percentage points, the most since May, from this year’s low of 1.47 percentage points reached in August.

Bernanke on Easing

Treasuries rallied yesterday, pushing the 10-year note yield down the most since Nov. 16, after Fed Chairman Ben S. Bernanke said in an interview broadcast Dec. 5 on CBS Corp.’s “60 Minutes” program that the central bank may boost debt purchases to support the economy.

The Fed bought today $6.81 billion of Treasuries maturing from December 2014 to May 2016 as part of an asset-purchase program aimed at lowering borrowing costs and stimulating economic growth, according to the New York Fed’s website.

German 10-year government bonds, the euro region’s benchmark securities, dropped today as traders speculated that Ireland will win parliamentary approval for an austerity plan as it seeks to seal an international bailout.

Irish Finance Minister Brian Lenihan told parliament in Dublin today that while cutting spending by 6 billion euros ($8 billion) next year is “demanding,” it shows the government’s commitment to reducing the budget deficit.

The German 10-year yield rose as much as 11 basis points to 2.96 percent, the highest level since May 13.

U.S. government debt has handed investors a 7.3 percent return this year, according to Bank of America Merrill Lynch indexes. German debt has gained 6.7 percent.

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