Yields on Italy’s 10-year notes reached as high as 6.68 percent, the most in 14 years, after Prime Minister Silvio Berlusconi bowed to domestic demands to water down a 45.5 billion euro ($62.5 billion) austerity package. Greek politicians agreed to form a national unity government to secure international financing. U.S. three-year note yields were little changed before a $32 billion sale the debt tomorrow.
“Today has been all about Europe amid concern that the Italian bond market will be the next concern that will drive investors into Treasuries,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market might need to price in a bit of a concession to take down the week’s auctions, but given the uncertainties from overseas, it’s reasonable to assume a general bullish atmosphere for Treasuries.”
The yield on the 10-year note was little changed at 2.04 percent at 5:30 p.m. New York time, according to Bloomberg Bond Trader prices. It reached 1.93 percent on Nov. 3, the least since Oct. 6. The 2.125 percent securities maturing in August 2021 fell 1/32 or 31 cents per $1,000 face value to 101 24/32. A basis point is 0.01 percentage point.
Three-year note yields rose 2 basis points to 0.38 percent.
The Standard & Poor’s 500 Index rose 0.6 percent after falling as much as 1 percent.
The Federal Reserve bought $2.7 billion of debt maturing from February 2036 to August 2041 under its program to lower borrowing costs. The Fed began its Maturity Extension Program, known as Operation Twist in October and plans to buy $400 billion in longer-term maturities by the end of June 2012 -- about $44 billion per month.
Italy’s yields gained even after the European Central Bank was said to have bought the nation’s debt today. With almost 1.6 trillion euros of bonds outstanding, Italy has more liabilities than Spain, Portugal and Ireland combined, making it vulnerable to increases in borrowing costs. The Greek two-year yield climbed to more than 107 percent.
Prime Minister Silvio Berlusconi struggled to hold on to power and prove he can implement austerity measures pledged to European Union allies as reports of his imminent resignation sent Italian stocks surging.
News agency Ansa said Berlusconi denied a report by Giuliano Ferrara, his former spokesman and editor of newspaper Il Foglio, who wrote today that the premier would step down “within hours.” Berlusconi will likely resign next week in return for support in a vote on the austerity and economic- growth measures, Ferrara said in a phone interview after his initial report.
“The marginally good news coming out of Greece is being outweighed by troubling news coming out of Italy, which explains why the risk-on rally that some might have expected has not materialized this morning,” Kevin Giddis, president of fixed- income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients.
Credit-default swaps on Greek government debt suggest an 89 percent chance of default within five years, data from CMA show. The chance that Italy will fail to meet its debt obligations is 36 percent, while the U.S. is at 4 percent, the data show.
The U.S. government plans to sell $72 billion of debt this week. The three-year notes to be sold tomorrow yielded 0.39 percent in pre-auction trading, dropping from the 0.544 percent at the prior sale on Oct. 11.
Investors bid for 3.3 times the amount for sale in October, more than the average of 3.21 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, bought 37.8 percent of the notes compared with 35.9 percent in the prior auction.
The Treasury is scheduled to sell $24 billion of 10-year notes on Nov. 9 and $16 billion of 30-year bonds on Nov. 10.
Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending Nov. 1, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 128,693 contracts on the Chicago Board of Trade. Net-short positions rose by 62,813 contracts, or 95 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
The median forecast of economists surveyed by Bloomberg News is for Treasury 10-year yields to rise to 2.24 percent by the end of December and 2.35 in the first quarter of 2012.
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