Treasury 30-Year Bonds Gain on European-Debt Concern, Fed’s Debt Buying

Treasury 30-year bonds rose for the first time in three days amid concern new governments in Greece and Italy will struggle to contain sovereign-debt problems.

The yield on the 30-year bond fell after the Federal Reserve purchased securities maturing from 2036 to 2041 as part a policy known as Operation Twist. U.S. government debt rose as Prime Minister Lucas Papademos took charge as head of an interim Greek government and Mario Monti, former European Union commissioner, agreed to be Italy’s leader. Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy is “poised for growth” going into next year.

“There’s better news out of Europe, but it’s not having the same down effect,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “People are starting to take a defensive posture. The market is not in agreement that the crisis is over. Nobody wants to be short.” A short is a bet the price of a security will drop in value.

U.S. 30-year bond yields fell two basis points, or 0.02 percentage point, to 3.1 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 rose 15/32, or $4.69 per $1,000 face amount, to 100 3/8.

Ten-year note yields fell one basis point to 2.06 percent.

Market Swings

Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose to 111.8 on Nov. 9. It touched a 2011 high of 117.8 on Aug. 8 and a 2011 low of 71.5 on May 31.

The Fed purchased $2.54 billion of Treasuries due from February 2036 to May 2041 today, according to its website. The central bank announced in September it would replace $400 billion of short-maturity debt with longer-term securities to contain borrowing costs. Yields on 10-year U.S. notes are about 38 basis points above the record low of 1.67 percent set on Sept. 23.

Treasuries have returned 0.6 percent this month as of the end of last week, compared with a 1.4 percent gain in German bunds, Bank of America Merrill Lynch data show. Japanese government debt has increased 0.5 percent.

Greek Governing

Greece’s Papademos said yesterday the government must implement decisions from an Oct. 26 European summit and tackle unemployment. Greece needs to receive a sixth loan installment of 8 billion euros ($11 billion) before it runs out of money in mid-December.

Monti, an economist, takes on the role of Italian prime minister with the challenge of trying to reassure investors that the nation can cut its 1.9 trillion-euro debt burden and spur economic growth to reduce borrowing costs that last week soared to record levels.

Italy sold 3 billion euros of five-year bonds, the maximum target, at the highest yield in more than 14 years. The bonds yielded 6.29 percent, up from 5.32 percent at the last auction on Oct. 13. Demand was 1.47 times the amount on offer, compared with 1.34 times last month.

The extra yield that U.S. Treasury 10-year notes offer over same-maturity German bunds widened to 25 basis points from 17 basis points last week.

Recession Forecast

The odds of a U.S. recession in early 2012 exceed 50 percent as a result of Europe’s debt crisis, according to researchers at the Fed Bank of San Francisco.

“Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic,” economist Travis Berge, research associate Early Elias and research adviser Oscar Jorda wrote in a paper released by the bank today. “A European sovereign debt default may well sink the U.S. back into recession.”

Demand for Treasuries waned before government and central bank reports this week that economists said will point to improvement in the world’s largest economy.

Retail sales rose 0.3 percent in October, according to the median forecast in a Bloomberg News survey before Commerce Department figures tomorrow. That would follow a 1.1 percent gain in September that was the biggest in seven months.

Fed Bank of Dallas Fisher said he sees a declining likelihood the central bank will need to ease further.

“The direction we’re moving in is positive,” the policy maker said today in an interview from Bloomberg’s headquarters in New York. He said he expects gross domestic product to expand by 2.5 percent to 3 percent in the fourth quarter, “gradually getting better as we go through time.”

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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