Treasuries failed to rebound from a loss yesterday after Germany and France said they want new European Union rules on borrowing limits and penalties for deficit violators to curb the region’s debt crisis.
Investors demanded 15 basis points of extra yield to buy 10-year German bonds instead of same-maturity U.S. notes, less than half of what they required a week ago, as demand for the relative safety of American debt eased. Treasuries have fluctuated this year in response to developments in Europe, with the flight to quality sending U.S. 10-year rates to a record low of 1.67 percent in September.
“Yields should be higher” in the U.S., said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd., the nation’s largest lender as measured by assets. “Close integration helps keep the euro together. It reduces the bid for safe-haven assets.”
Benchmark U.S. 10-year rates were little changed at 2.05 percent as of 6:55 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 changed hands at 99 17/32. The rate rose one basis point, or 0.01 percentage point, yesterday.
Japan’s 10-year rate fell one-half basis point to 1.04 percent. The yield has declined from the 1.09 percent level reached on Dec. 1 that was the most since July.
With the fate of the currency shared by the 17 countries at risk, German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday presented a common platform for a Dec. 8-9 EU summit in Brussels that aims to halt the three-year crisis.
“We expect to conclude our review of euro-zone sovereign ratings as soon as possible following the EU summit,” 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.”
It’s too soon to start betting that Europe is solving its debt crisis, said Zeal Yin, a money manager at Taipei-based Shin Kong Life Insurance Co., after efforts to boost the 440 billion- euro ($588 billion) rescue fund to 1 trillion euros failed last month.
Insufficient Funding Sources
“I’m bullish,” on Treasuries, said Yin, who helps oversee the equivalent of $51 billion at Taiwan’s second-largest life insurer. “I don’t think they have the sources to raise the funds. It’s a very big problem.”
The difference between the three-month London interbank offered rate and the overnight index (MXAP) swap widened to 44 basis points yesterday. The spread, which increases as banks become less willing to lend to each other, was the most since 2009.
Ten-year Treasury rates will probably slide to 1.75 percent in early 2012, according to Deutsche Bank AG, one of the 21 primary dealers that underwrite the U.S. debt.
“It is too early to return to ‘risk on’ trades,” Dominic Konstam, the New York-based global head of rates research wrote in a report. Deutsche Bank distributed the document, dated Dec. 2, yesterday by e-mail.
The Federal Reserve is scheduled to purchase as much as $2.75 billion of Treasuries due from 2036 to 2041 today as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to keep rates down.
Australia Rate Cut
Australia’s central bank lowered its benchmark interest rate today for a second-straight month as Europe’s fiscal crisis threatens to slow the nation’s commodity exports to Asia. Governor Glenn Stevens and his board reduced the bank’s target for overnight lending by a quarter percentage point to 4.25 percent.
Demand for safety has driven Treasuries to a 8.9 percent gain in 2011 as of yesterday, the most since 2008, according to Bank of America Merrill Lynch figures. German bunds returned 7.1 percent and Japanese bonds advanced 1.8 percent.
The MSCI All Country World Index of stocks handed investors a 5.2 percent loss in the period after accounting for dividends.
The Treasuries rally is coming to an end, judging by forecasts from economists.
A Bloomberg survey of banks and securities companies projects U.S. 10-year yields will rise to 2.19 percent by year- end, with the most recent forecasts given the heaviest weightings. National Australia’s Jolly predicts 2.25 percent.
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