Treasuries Erase Gains as Italy’s Berlusconi Plans to Step Down After Vote

Treasuries fell as Italian Prime Minister Silvio Berlusconi agreed to resign after the parliament approves the country’s austerity plans, easing demand for haven assets.

U.S. debt had gained earlier on concern Italy’s sovereign- debt problems may spread to other European nations. A $32 billion auction of three-year notes attracted the highest demand since at least 1993 before a sale tomorrow of $24 billion of 10- year notes.

“The view is that a change in government or prime minister will make it easier for Italy to take the hard steps it needs to take,” said Amitabh Arora, an interest-rate strategist in New York at Citigroup Inc., one of 21 primary dealers that trade with the Federal Reserve. “Berlusconi is viewed as part of the problem.”

The yield on the 10-year note rose four basis points to 2.08 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It fell as low as 1.997 percent today. The 2.125 percent securities maturing in August 2021 fell 11/32, or $3.44 per $1,000 face amount, to 101 13/32. A basis point is 0.01 percentage point.

Debt Sales

The Treasury is selling $72 billion in notes and bonds this week, concluding with the sale of $16 billion of 30-year debt on Nov. 10.

“People are looking for a safe haven given the concerns over Italy, and the three-year note qualifies as that,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, a primary dealer. “It’s been very difficult for dealers to set up for the 10- and 30-year auctions, so the market action will be interesting in the run-up to those auctions.”

Today’s three-year note sale of notes drew a yield of 0.379 percent, compared with a forecast of 0.393 percent in a Bloomberg News survey of eight of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.41, compared with an average of 3.21 for the past 10 sales.

Indirect bidders at the three-year note sale, an investor class that includes foreign central banks, purchased 38.7 percent of the notes, compared with an average of 35.9 percent for the past 10 sales.

Bid Details

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.9 percent of the notes at the sale, compared with an average of 11.8 percent for the past 10 auctions.

The Treasury stopped selling three-year securities in 2007 as it cut back on the range of maturities for U.S. government debt sales as the budget deficit narrowed to $162 billion in 2007 from a then-record $412.8 billion in 2004. It had also suspending the offerings in 1998 when the U.S. recorded its first budget surplus since 1969.

Sales of the securities resumed in November 2008 as the U.S. sought to raise money to bolster the economy and the financial system following the collapse of Lehman Brothers Holdings Inc.

The auction raised $2.6 billion in fresh cash as more than $29.4 billion of maturing three-year securities are held by the public and the Fed, including $23.9 billion by the public and $5.5 billion by the central bank, according to Treasury data.

Note Returns

Three-year notes have returned 3.2 percent this year, compared with a gain of 8.8 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes.

Treasury investors have become less optimistic about the debt, according to a weekly poll of clients by JPMorgan Chase & Co. The number of investors betting on the securities to gain fell to 8 percent from 17 percent, while the number of respondents betting against the securities more than doubled to 13 percent from 6 percent, the firm said.

After intervening to weaken its currency by selling as much as 8 trillion yen ($100 billion) on Oct. 31, Japan may use the dollar proceeds to buy Treasuries at this week’s auctions, according to strategists at Bank of America Corp.

Foreign participation “increased noticeably” at the Aug. 10 offering of $24 billion 10-year notes after Japan’s $59 billion intervention on Aug. 4, wrote Bank of America interest- rate strategist Shyam Rajan in a Nov. 4 note to clients.

Italy Votes

Berlusconi’s resignation plan came after he failed to muster an absolute majority on a routine parliamentary ballot, obtaining only 308 votes in the 630-seat Chamber of Deputies today.

“Berlusconi leaving doesn’t necessarily give the market the details it wants on how the debt crisis is resolved,” said Kathleen Gaffney, a money manager at Boston-based Loomis Sayles & Co., which oversees $157 billion. “Treasuries in the short- term will continue to provide a safe haven.”

The yield on Italy’s benchmark 10-year bond jumped 11 basis points today to 6.77 percent, the most since the euro’s introduction in 1999 and near the 7 percent level that drove Greece, Ireland and Portugal to seek international bailouts. The extra premium investors demand to hold the debt instead of German bunds widened to a record 497 basis points.

Treasury 10-year yields may rise to 2.23 percent by the end of December and 2.35 in the first quarter of 2012, according to the median forecast of economists surveyed by Bloomberg News.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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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