Treasuries Erase Drop After S&P Warns of European Credit Rating Reductions

Treasuries erased losses after Standard & Poor’s warned it may cut the credit ratings of Germany and 14 other euro-zone member nations, renewing the refuge appeal of U.S. government securities.

Yields on benchmark 10-year notes had climbed as high as eight basis points before closing little changed at 2.04 percent after S&P said ratings may be reduced as earlier as the conclusion of a European Union meeting at the end of this week.

“It continues to be very difficult to short Treasuries with continued problems around the world, ”said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of the 21 primary dealers that trade with the Federal Reserve.

The 10-year note yielded was little changed from yesterday at 2.04 percent at 4:51 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 fell 1/32, or 31 cents per $1,000 face amount, to 99 21/32.

Stocks pared their gains, with the S&P 500 Index advancing 1 percent after gaining 1.8 percent. The Stoxx Europe 600 Index increased for a second straight day, rising 0.8 percent, before the S&P announcement.

“We expect to conclude our review of euro-zone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011,” S&P said in a statement. “Ratings could be lowered by up to one notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments.”

European Summit

The downgrade warnings come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis.

With the fate of the currency shared by the euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis, now in its third year.

Bonds began to pare their drop after the Financial Times reported earlier that S&P planned to reduce six AAA outlooks, without citing the source of the information.

Sarkozy said at a press conference with Merkel in Paris that the French and German governments want to have a new treaty agreed to among all euro-zone countries by March. The German and French leaders plan to send a letter on Dec. 7 to European Union President Herman Van Rompuy outlining their ideas for a treaty imposing stricter limits on the budgets of euro members.

Italian bonds rose today, narrowing the extra yield investors get for holding the nation’s securities instead of German bunds to as little as 3.94 percentage points, the least since Oct. 31. The euro was little changed at $1.3397.

Monti’s Plan

Prime Minister Mario Monti of Italy presented lawmakers a proposal for 30 billion euros ($40.4 billion) of austerity and growth measures approved by the cabinet yesterday.

Funding next year’s $1.3 trillion U.S. budget deficit may get a boost from Germany as bunds underperform Treasuries for the first time since the European debt crisis began in 2009.

While the U.S. needs to double bond sales to investors after the Fed reduced purchases, Treasuries due in 10 years or more are 2011’s best-performing sovereign securities, returning 26 percent as of Nov. 30, according to Bloomberg/EFFAS indexes.

Germany’s 30-year bonds yielded more than U.S. peers last month for the first time since May 2009 as its government was only able to find buyers for 65 percent of a 6 billion euro sale on Nov. 23, its worst auction in 16 years.

Obama on Bonds

President Barack Obama’s administration will more than double sales to investors to about $1 trillion from $454 billion in 2011 because the Fed’s stimulus programs have diminished, JPMorgan Chase & Co. (JPM) said in a Nov. 25 report.

The Fed announced in September it would replace $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs.

The central bank bought $1.736 billion of Treasuries due from 2022 to 2031 and purchased $4.902 billion of securities maturing from 2018 to 2019 under the program today, according to the New York Fed’s website.

Treasuries earlier today pared losses after the Institute for Supply Management’s U.S. non-manufacturing index fell to 52 in November from 52.9 a month earlier. Fifty is the dividing line between expansion and contraction.

“The markets are more focused on what’s going on in Europe,” said Guy LeBas, chief fixed-income strategist in Philadelphia at Janney Montgomery Scott LLC, which oversees $12 billion in fixed-income assets.

Ten-year note yields will climb to 2.41 percent by June 2012, according to the average forecast in a Bloomberg News survey of financial 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; Daniel Kruger in New York at dkruger1@bloomberg

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

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