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Treasuries Rise as Call for Greece Referendum Fuels Debt Crisis Concern

Treasuries rose, a day after the biggest rally in 30-year bonds since March 2009, as renewed concern Greece will default and the European rescue plan will unravel boosted demand for the safest assets.

U.S. government debt securities gained for a third day after Greek Prime Minister George Papandreou called for a referendum and a parliamentary confidence vote, threatening efforts to contain the euro-zone debt crisis. Treasuries were supported along with German bunds and U.K. gilts as stocks fell around the world. Federal Reserve policy makers will complete a two-day meeting tomorrow.

“It’s a very wild and volatile market, but no matter what takes place, the rhetoric out of Europe just makes you very nervous to invest in risk markets right now,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There have been many mixed messages, but it doesn’t look like a euro resolution will be fixed cleanly, and thus Treasuries catch a bid.”

Yields on 30-year bonds dropped 13 basis points, or 0.13 percentage point, to 3 percent at 5:23 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 gained 2 24/32, or $27.50 per $1,000 face amount, to 114 21/32. The yield slid 25 basis points yesterday, the most on a closing basis since March 2009.

The 38 basis point drop in 30-year bond yields since Oct. 28 is the most on a closing basis since the two-day period ended Sept. 22.

Note Yields

The 10-year note yields fell 12 basis points to 1.99 percent, and touched the lowest since Oct. 6. Ten-year gilt yields fell 23 basis points to 2.21 percent. German 10-year yields fell 26 basis points to 1.77 percent.

U.S. two-year note yields fell one basis point to 0.23 percent, touching the lowest since Sept. 26. The yield curve, or the difference between two- and 30-year Treasuries, narrowed for a third day to 274 basis points, touching the narrowest since Oct. 10.

The Standard & Poor’s 500 Index slid 2.8 percent. The euro weakened 1.1 percent to $1.3703.

The Fed sold $8.63 billion of Treasuries as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

Greek Politics

European leaders pressed Greece to uphold the terms of a five-day-old bailout agreement in a bid to stop the deal unraveling on the eve of a global summit, after Papandreou said he’d put the plan to a referendum. Dow Jones Newswires reported that a Greek Socialist Party official said the plan to have voters approve the rescue is “basically dead.”

German Chancellor Angela Merkel and French President Nicolas Sarkozy held emergency talks on Greece today and called on Europe to implement the package of measures thrashed out in Brussels last week.

“The Greece situating may not be as well contained as originally thought,” said Christopher Sullivan, who oversees $1.7 billion as chief investment officer at United Nations Federal Credit Union in New York. “A disorderly Greek default would wreak havoc on the world’s financial markets.”

The two-year swap spread widened to 35 basis points, more than the 24 basis point average for the spread this year. In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed rate and the yield on similar-maturity Treasuries.

Swap Spreads

“Psychologically, the swap spread brings the credit issues of the whole euro crisis to the forefront,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 21 primary dealers that trade with the Fed. “Banks are paying more to lend to each other because it’s still very uncertain how this will end up, and funding concerns are real.”

MF Global Holdings Ltd’s bankruptcy yesterday helped to drive repurchase agreement rates higher.

Following the MF Global bankruptcy announcement, the Fixed- Income Clearing Corp. stopped clearing trades for the futures borker, according Scott Skyrm, senior vice president and head of repo and money markets for NewEdge USA LLC in New York. Overnight general collateral Treasury repurchase, or repo, rates, surged to 0.31 percent as a result, a sign a shortage of cash in the funding market as a result, according to Skyrm.

The central bank announced in September that it would replace $400 billion of short-term debt with longer-term Treasuries to contain borrowing costs. The Fed previously purchased $2.3 trillion in debt in two rounds of quantitative easing.

‘More Negative’

A failure by a congressional supercommittee to reach agreement on deficit reduction wouldn’t, on its own, cause the U.S. to lose its top credit ranking, Moody’s Investors Service said.

While the failure “would be more negative,” the lack of an agreement isn’t decisive for the U.S.’s Aaa rating because the government’s August agreement to reduce the deficit includes $1.2 trillion in automatic cuts to discretionary spending that would begin in October 2012, Moody’s said today in a statement.

Treasuries have returned 8 percent this year, the most since 14 percent in 2008, according to Bank of America Merrill Lynch index data.

To contact the reporter 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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