Treasuries Decline Amid Optimism on European Crisis, Concern on U.S. Debt
Treasuries fell, eroding yesterday’s gains, on speculation European leaders are making progress on the region’s debt crisis and concern U.S. officials have further to go to cut the deficit and raise the borrowing ceiling.
U.S. 30-year bond yields rose after tumbling yesterday the most since 2010 on optimism a bipartisan proposal would resolve a stalemate and allow the debt limit to be increased before the Aug. 2 deadline. French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Berlin before a European Union summit tomorrow in Brussels on the crisis, a French government official said, speaking on condition of anonymity.
“What ultimately gets done is very uncertain still, but some of the headlines were positive,” Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, said of the summit. A deficit-cutting proposal by six U.S. senators is “a step in the right direction, but it doesn’t change the landscape a whole lot in terms of whether a grand plan is likely to be passed in the near term,” he said.
Yields on 30-year bonds climbed six basis points, or 0.06 percentage point, to 4.25 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They dropped yesterday as much as 13 basis points, the most since December 2010. The 4.375 percent security due in May 2041 fell 1 2/32 today, or $10.63 per $1,000 face amount, to 102 2/32.
Benchmark 10-year note yields rose five basis points to 2.93 percent after decreasing five basis points yesterday.
German Bonds
The difference between yields on German 10-year notes and Treasuries of comparable maturity narrowed to 16 basis points, the least in a week.
The gap between 10-year yields on Italian and German debt, which is considered a refuge for European investors, narrowed to 2.84 percentage points, from 3.32 percentage points July 18, the most since the debut of the euro in 1999. The spread between 10- year yields on Spanish and German notes shrank to 3.21 percentage points, down from a euro-era record 3.67 percentage points on July 18.
“It’s more optimism about what’s going on in Europe and the ability of the EU to come together and reach some sort of agreement and stave off this crisis from affecting Italy and Spain,” said Anthony Cronin, a trader at Societe Generale in New York, one of the Federal Reserve’s 20 primary dealers.
European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the debt crisis from spreading, a person close to the talks said. Other options include allowing the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress.
Republican Resistance
A bipartisan proposal from six senators for a $3.7 trillion debt reduction plan, praised yesterday by President Barack Obama, now faces resistance from House Republicans as lawmakers intensify efforts for a compromise on government spending.
Treasuries surged yesterday when the plan, which combines spending cuts with a smaller amount of tax increases, was revived.
“Yesterday was probably a bit of an over-reaction to the news and we’re getting a pull back, a reasonable pullback,” said Pond of Barclays, a primary dealer.
While House Republican leaders indicated a willingness to consider the proposal, they and other members of their fiscally conservative caucus continue to stress opposition to a debt compromise that includes more taxes.
‘Complicated Plan’
“You do have a little bit of a retracement of what we saw at the end of the day yesterday, which is somewhat natural when you see a big move like that,” said Scott Sherman, an interest- rate strategist in New York at the primary dealer Credit Suisse Group AG. “It’s a complicated plan. Is there really time to get this through Congress in time?”
The Obama administration signaled it may accept a short- term increase in the U.S. debt limit if it is combined with a major agreement to cut the deficit.
Obama “must have a firm commitment to something big” on cutting the deficit before he would sign a short-term rise in the debt ceiling, White House spokesman Jay Carney told reporters. The president met with top congressional Democrats at about 3 p.m. Washington time, and was to meet later with Republican leaders.
Treasuries have returned 1.3 percent this month, according to a Bank of America Merrill Lynch index, amid investor demand for refuge. The MSCI World Index of stocks has dropped 0.5 percent after accounting for reinvested dividends.
Yield Difference
The difference in yields between U.S. two- and 30-year debt widened to 3.87 percentage points, from 3.82 percentage points yesterday. It touched 3.95 on July 5, the most since February. The five-year average is 2.32 percentage points.
The yield gap between 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices known as the break-even rate, was 2.31 percentage points, up from 1.71 percentage points a year ago. The five-year average is 2.07.
The U.S. will auction $13 billion of 10-year TIPS tomorrow.
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net;
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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