Treasuries Fall on ECB Interest-Rate Cut, Eased Greece Debt Plan Concern

Treasuries dropped as concern eased that Greece would reject its financial bailout package and the European Central Bank unexpectedly cut interest rates, reducing refuge demand.

Benchmark 10-year yields rose for the first time in five days as Group of 20 leaders converged in Cannes, France, and Greek Prime Minister George Papandreou signaled he won’t call a referendum that would have called into question the nation’s membership in the euro. The ECB cut its rate at President Mario Draghi’s first meeting in charge and he said Europe is heading toward a “mild recession.” The U.S. will sell $72 billion in notes and bonds next week.

“They scrapped the referendum in Greece, so it faded the flight-to-quality bid,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Dealers are probably setting up for the refunding next week. It’s volatile.”

Yields on 10-year notes rose eight basis points, or 0.08 percentage point, to 2.06 percent at 2:36 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 fell 22/32, or $6.88 per $1,000 face amount, to 100 17/32.

The 30-year bond yields increased 10 basis points to 3.11 percent after sliding six basis points to 2.96 percent. Two-year note yields added one basis point to 0.24 percent.

The Standard & Poor’s 500 Index advanced 1.5 percent.

Market Pressure

“We’re seeing pressure on the long end because of positive developments out of Greece, and the ECB cut provided a boost of the equity markets,” said Dan Mulholland, a Treasury trader in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank.

Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two- to 30 years, was 112 yesterday, almost at this year’s high of 117.8 reached on Aug. 8, and above the 93.13 average for this year. It touched the year’s low of 71.5 on May 31.

More than $220 billion of Treasuries changed hands as of 2:01 p.m. in New York, according to ICAP Plc, the world’s largest interdealer broker. Volume has averaged $300.4 billion this year. It reached a high of $542 billion on Aug. 5 and touched a low of $132 billion on April 25.

“The price action is moving us around, but no one is making big bets here,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “We’re back and forth on these headlines.”

Bond Returns

Treasuries have returned 8.8 percent this year, the most since U.S. government debt returned 14 percent in 2008 in the midst of the financial crisis, according to Bank of America Merrill Lynch index data.

The ECB unexpectedly cut interest rates as Italian and Spanish borrowing costs soared after euro-area leaders raised the prospect of Greece exiting the monetary union. The central bank cut its benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point cut.

Treasuries were lower as a report showed jobless claims fell by 9,000 to 397,000 in the week ended Oct. 29, the fewest in a month. The median forecast of 49 economists in a Bloomberg News survey called for a drop to 400,000. The total number of people on unemployment benefit rolls decreased to a six-month low.

Jobs Pattern

A Labor Department report tomorrow is forecast to show the U.S. added 95,000 jobs, according to 84 economists in a separate survey, compared with 103,000 the previous month. The unemployment rate is forecast to remain at 9.1 percent from the previous month, a separate survey showed.

Federal Reserve Chairman Ben S. Bernanke said yesterday that unemployment is still “far too high” and the central bank may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

The central bank left intact its pledge to leave its target interest rate in a range of zero to 0.25 percent until mid-2013.

The Treasury will sell $32 billion of three-year notes on Nov. 8, $24 billion of 10-year debt on the following day and $16 billion of 30-year bonds on Nov. 10.

“Dealers are probably setting up for the refunding next week,” said Williams Capital’s Coard.

Greek two-year note yields climbed to more than 100 percent for the first time today on concern the nation may default on its outstanding government debt.

President Barack Obama arrived at a summit of international leaders declaring that the European Union must “flesh out more of the details” of a deal reached last week to contain the region’s debt crisis.

“The most important aspect of our task over the next two days is to resolve the financial crisis here in Europe,” Obama said today during a joint appearance with French President Nicolas Sarkozy before the opening of the G-20 summit.

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 at dliedtka@bloomberg.net

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