U.S. 10-Year Notes Gain for a Third Day on Concern About European Debt

Treasury 10-year note yields fell for a third straight day for the first time since November amid concern about a bailout for Portugal, and as it joins Spain and Italy in plans to borrow at least $43 billion this week.

Two-year note yields touched the lowest in almost five weeks as the cost of insuring Portuguese bonds against default rose to a record. Treasuries yields extended a drop from Jan. 7, after Federal Reserve Chairman Ben S. Bernanke said the labor- market recovery will be gradual and a report showed the nation’s employers added fewer jobs than forecast. The Fed bought $7.79 billion in Treasuries due from February 2018 to August 2020 as part of its plan to spur the economy.

“There’s a spillover from Europe,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada’s RBC Capital Markets in New York, one of 18 firms that trade directly with the Fed. “The front end of the market after Bernanke spoke on Friday realizes the Fed is not in any rush to remove accommodation, so it’s relatively well bid.”

Ten-year yields dropped four basis points to 3.29 percent, at 5:08 p.m. in New York, BGCantor Market Data show, the first three-day decline since Nov. 30. The 2.625 percent security maturing in November 2020 rose 10/32, or $3.13 per $1,000 face value, to 94 15/32.

Two-year note yields fell two basis points to 0.57 percent, the least since Dec. 8.

Finding Buyers

The market has “growing concerns” that Portugal may not find as many willing buyers for its debt as it would like, Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. There is a “renewed focus on the beleaguered Euro-zone economies.”

Appetite for the haven of Treasuries will reverse a sell- off that pushed yields to a seven-month high in December, Nomura Holdings Inc. said in a report.

“Demand will return, especially in the form of flight-to- quality type bids, given the ongoing concerns over the euro zone,” George Goncalves and Aaron Kohli, analysts at Nomura in New York, wrote in a report today. The company is one of the 18 primary dealers required to bid at government debt sales.

Germany, France

Germany and France will pressure Portugal to seek help from the European bailout fund to prevent contagion to other countries such as Spain and Belgium, Der Spiegel reported on Jan. 8, without saying where it got the information. The German Finance Ministry said yesterday it isn’t pressuring Portugal.

The extra yield investors demand to hold 10-year Portuguese debt instead of same maturity German bunds widened to 4.33 percentage points on Jan. 7, the most since November.

Credit-default swaps on Portugal jumped 14 basis points to a peak of 552.

The European Central Bank bought Portuguese government bonds today, according to three traders with knowledge of the transactions.

Labor Department data on Jan. 7 showed nonfarm payrolls increased by 103,000 jobs, versus the median forecast of 150,000 in a Bloomberg News survey. A report by ADP Employer Services on Jan. 5 showed companies added 297,000 positions last month, triple the number forecast.

Jobs Adjustment

“People priced in the Fed going to neutral after the ADP numbers,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “The bias for the Fed to go neutral is out the window as long as employment remains stubbornly high.”

Atlanta Fed Bank President Dennis Lockhart said he sees further “headwinds” to the recovery even as the U.S. economy improves in 2011, in prepared remarks for a speech in Atlanta that was canceled because of snow.

Lockhart cited uncertainty among businesses and consumers and the damaged housing and credit markets as likely to hold back economic growth, underscoring his view that the Fed’s $600 billion bond-purchase program is a worthwhile insurance policy against risks.

Consumer prices probably advanced 0.4 percent in December after rising 0.1 percent the previous month, according to a Bloomberg survey ahead of a Labor Department report due on Jan. 14. Excluding food and fuel costs, core prices were up 0.1 percent for a second month.

Debt Sales

The Treasury will sell $66 billion in securities this week in the year’s first note and bond auctions. The U.S. will sell $32 billion in three-year debt, $21 billion in 10-year securities and $13 billion in 30-year bonds on three consecutive days, beginning tomorrow. The amounts are unchanged from last month’s sales of the maturities.

Treasuries are down 0.4 percent during the past month, according to Bank of America Merrill Lynch indexes, on signs of improvement in the economy.

Fund managers in a weekly survey by Ried Thunberg ICAP Inc. became more bearish on the outlook for Treasuries through March. Ried’s sentiment index declined to 47 for the seven days ended Jan. 7 from 48 the week before. A figure of less than 50 indicates investors expect prices to fall.

The 10-year yield will fall to 3.05 percent by March 31 and then advance to 3.55 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net;

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

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