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Treasuries Rise Before 3-Year Auction as Italy Vote Spurs Debt Concern

Treasuries gained before the U.S. government’s sale of $32 billion of three-year notes as a budget vote in Italy fueled concern Europe’s debt crisis will spread, boosting demand for refuge assets.

U.S. three-year note yields traded at almost the lowest level since September as Prime Minister Silvio Berlusconi failed to muster an absolute majority in a routine parliamentary ballot, fueling further calls for him to resign as Italy struggles to convince investors it can fund itself. Greek Prime Minister George Papandreou resumed talks with his opposition rival in Athens as they moved closer to agreement on naming the premier of a Greek unity government.

“People are scared of headline risk,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The risky position to have in Treasuries is to be short. Even though we have a big chunk of supply coming, people are afraid to be short, and with good reason.” A short position is a bet that an asset will decline in value.

The yield on the 10-year note fell three basis points to 2 percent at 11:24 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 fell 10/32, or $3.13 per $1,000 face amount, to 101 2/32. A basis point is 0.01 percentage point.

Three-year note yields were little changed at 0.38 percent. The yield touched 0.32 percent on Nov. 3, the lowest since Sept. 22.

Investors’ Mood

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.

Fed Buys

The central bank bought $4.68 billion of debt today due from November 2019 to August 2021 under its program to lower borrowing costs. The Fed plans to buy $400 billion in longer- term-maturity debt and sell shorter maturities to support the economy by the end of June 2012 under the program known as Operation Twist.

Three-year Treasury notes to be sold today yielded 0.40 percent in pre-auction trading, dropping from the 0.54 percent at the prior sale on Oct. 11.

Investors bid for 3.3 times the amount for sale at the October sale, more than the average of 3.2 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 the 10-sale average of 35.9 percent.

Direct bidders, non-primary dealers buying for their own accounts, purchased 7.8 percent of the notes, the least since December 2009.

Auction Watch

“All eyes are on the three-year auction, and Europe,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “You’ve got back and forth over whether the Italian premier will resign and what that would mean to the other peripheral European economies.”

European Central Bank council member Jens Weidmann said the ECB cannot bail out governments by printing money.

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann said in a speech in Berlin today.

The extra yield investors demand to hold Italy’s 10-year bonds instead of similar-maturity Treasuries climbed to 4.69 percentage points, the fourth-highest among bond markets for euro-region nations, after Greece, Portugal and Ireland.

The rate at which London-based banks say they can borrow for three months in dollars rose for a sixth straight day, reaching the highest level since August 2010. The London interbank offered rate, or Libor, for three-month dollar loans increased to 0.44417 percent from 0.44139 percent yesterday, data from the British Bankers’ Association showed. That’s the highest level since Aug. 2, 2010.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, climbed to 44.42 basis points from 44.14 basis points yesterday, set for the highest closing level since June 17, 2010.

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; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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