Treasuries Gain Most Since August as Europe Stalls on Debt-Crisis Plan

Treasuries advanced, pushing the yield on the 10-year note down the most since August, as European leaders struggled to agree on a coordinated approach to stem the sovereign-debt crisis, stoking demand for refuge.

U.S. 30-year bond yields dropped the most on a weekly basis since September as officials at a Group of 20 meeting yesterday failed to agree on boosting the International Monetary Fund’s resources that would aid Europe. Governments await details of Europe’s week-old rescue package before they commit more cash, German Chancellor Angela Merkel said yesterday on the final day of the summit in Cannes, France. The U.S. will sell $72 billion in notes and bonds next week.

“The euro zone continues to give us an uncertain environment,” said Kevin Flanagan, a Purchase, New York-based chief fixed-income strategist for Morgan Stanley Smith Barney. “Uncertainty tends to be good for Treasuries and bad for the risk market. It will continue to be a headline driven market. Supply will be a consideration.”

Yields on 10-year notes decreased 28 basis points, or 0.28 percentage point to 2.03 percent yesterday in New York, according to Bloomberg Bond Trader prices. They touched 1.93 percent on Nov. 3, the lowest since Oct. 6. The price of the 2.125 percent securities maturing in August 2021 rose 2 15/32, or $24.69 per $1,000 face amount, to 100 26/32.

Thirty-year bond yields declined 28 basis points on the week to 3.09 percent, the biggest drop since Sept. 23.

Price Swings

Volatility in the Treasuries market touched 116 on Nov. 1, almost at this year’s high of 117.8 reached on Aug. 8, according to Merrill Lynch & Co.’s MOVE index, which measures price swings in Treasuries based on over-the-counter options maturing in two to 30 years. The average for this year is 93.1.

The U.S. plans to auction $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. The amounts of the auctions are unchanged from an August grouping of the same maturities. The Treasury will raise $48 billion in new cash from the sales.

Treasuries have returned 8.5 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.

U.S. debt gained this week as Greece’s largest opposition party rebuffed Prime Minister George Papandreou’s overtures to form a national unity government, raising the prospect of elections that could delay aid needed to prevent default. Papandreou scrapped a referendum on a bailout accord with the European Union to avert a split in his party before a confidence vote scheduled for late yesterday.

Europe Discussions

“There are repercussions throughout the whole system,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of 21 primary dealers that trade Treasuries with the Federal Reserve. “It’s more fear and concern in Europe.”

European leaders were confronted with the possible breakdown of the bailout they had fashioned on Oct. 27 during all-night talks to prove at the G-20 that Europe is back on the right track. French President Nicolas Sarkozy said it may take until February for a deal.

Italian 10-year bonds slid yesterday, pushing the yield as much as 21 basis points higher to 6.404 percent, the most since the euro was introduced in 1999.

Fed Policy

Treasuries rose Nov. 2 after Fed officials lowered their outlook for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year. The central bank refrained from taking any additional steps to ease monetary policy while saying “significant downside risks” remain.

Fed Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy requires additional stimulus. The central bank left intact its pledge to leave its target interest rate in a range of zero to 0.25 percent until 2013.

The Fed announced in September it would replace $400 billion of short-maturity U.S. debt with longer-term securities to contain borrowing costs and revive the economy. The Fed previously purchased $2.3 trillion in debt in two rounds of quantitative easing.

Market Seeks

“The market was looking for QE3,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “They are going to act if necessary. They are going to be a bit flexible, but the economy today is too strong.”

The Fed sold $8.6 billion in Treasuries maturing from August 2012 to March 2013 this week. It purchased $1.4 billion in TIPS on Nov. 3 maturing from January 2018 to February 2041, and $5 billion in Treasuries yesterday maturing from November 2017 to August 2019.

Treasury yields briefly rose yesterday following the U.S. employment report. The 80,000 increase in October payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed in Washington. The unemployment rate fell to 9 percent from 9.1 percent.

The 10-year yield will advance to 2.24 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 reporters 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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