Treasuries Gain Most in a Week Since November as Crisis Spurs Haven Demand

Treasuries had the biggest weekly gain since early November as divisions among European leaders a week after a region-wide summit renewed concern policy makers will be unable to resolve the area’s debt crisis.

Ten-year note yields fell to a two-month low, approaching a record, as Fitch Ratings lowered France’s rating outlook and put the grades of nations including Spain and Italy on review for a downgrade. Moody’s Investors Service cut Belgium’s rating. U.S. consumer prices were little changed last month, supporting the Federal Reserve’s view that inflation will stay subdued even as stimulus measures start to sustain growth. Record demand at this week’s Treasuries auctions added to optimism investor interest will stay strong at next week’s $99 billion in note sales.

“It’s the European woes,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “There’s clear risk aversion. Supply is of little concern to the market. The market is saying Treasuries are where the safe-haven bid is. Even at these low yields, there’s strong demand.”

The benchmark 10-year note yield dropped six basis points today, or 0.06 percentage point, to 1.85 percent at 5:02 p.m. New York time, according to Bloomberg Bond Trader prices. It reached 1.83 percent, the least since Oct. 5, approaching the record low of 1.67 percent reached on Sept. 23. The yield slid 21 basis points this week in the biggest decline since the period ended Nov. 4. The 2 percent securities due in November 2021 gained 17/32, or $5.31 per $1,000 face amount, to 101 3/8.

Thirty-Year Bonds

Thirty-year bond yields tumbled seven basis points to 2.85 percent. They dropped 26 basis points this week, also the most since the five days ended Nov. 4.

The gap between yields on two- and 30-year securities narrowed for the first week since November, shrinking to 2.63 percentage points. The 2011 average is 3.5 percentage points.

Three-month Treasury bill rates were negative 0.005 percent for the third straight day. The rate on the U.S. one month bill due Jan. 12 slid to negative .0152 percent.

Fitch said a “comprehensive solution” to Europe’s debt crisis is “technically and politically beyond reach.”

The rating company changed its outlook on France to negative, while affirming its AAA rating. It put the debt ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on rating watch negative, indicating they face a heightened probability of downgrade in the near-term.

Moody’s Cuts Belgium

Moody’s downgraded Belgium two levels to Aa3, citing factors including “the sustained deterioration” in funding conditions. The outlook was negative.

Standard & Poor’s said Dec. 5 it expected to conclude a review of euro-area sovereign ratings “as soon as possible” after a European summit that ended a week ago.

Treasuries gained after Germany’s Bundesbank said it sees no urgent need for a decision on a loan to the International Monetary Fund, suggesting the Dec. 19 deadline set by EU leaders may be missed. The leaders decided Dec. 9 at their summit to channel an additional 200 billion euros ($261 billion) in loans to the IMF to help fight the debt crisis.

“We want to evaluate the whole situation,” a spokesman for the Frankfurt-based Bundesbank said by telephone.

Luxembourg’s Jean-Claude Juncker, who leads a group of finance ministers from the region, said the EU should meet the deadline. Juncker also told reporters in Luxembourg today that the euro region is “on the brink of a recession.”

Political Turmoil

There’s no clarity on how Europe will resolve its crisis amid the region’s political turmoil, Ira Jersey, an interest- rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the Fed, said today in an interview with Sara Eisen and Erik Schatzker on Bloomberg Radio.

“Treasuries are the beneficiaries of that,” Jersey said.

U.S. consumer prices stagnated last month, Labor Department data showed, supporting the Fed’s view that inflation remains in check. The unchanged reading in the consumer-price index followed a 0.1 percent decline in October. It compared with a 0.1 percent rise forecast in a Bloomberg News survey. So-called core prices, which exclude food and energy costs, rose 0.2 percent, more than forecast.

“The implications of CPI are not what they used to be,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the U.S. central bank. “The figures were as expected. There’s very little market reaction.”

Inflation Bets

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the debt, decreased for a fourth day, the longest stretch in a month, reaching 1.91 percentage points. The 10-year average is 2.13 percentage points.

The 10-year note yield will trade at about 2 percent through mid-year, Citigroup Inc. forecast in a report today. It said the yield may climb to 2.7 percent in late 2012.

The Treasury will sell next week $35 billion of two-year notes, the same amount of five-year debt and $29 billion of seven-year securities. The amounts were unchanged from the last auctions of the notes in November.

The government auctioned $12 billion in five-year Treasury Inflation Protected Securities yesterday at a record low yield of negative 0.877 percent.

The offering capped the sale of $78 billion in notes, bonds and inflation-linked debt this week. The government sold $13 billion in 30-year bonds Dec. 14 at a record low auction yield of 2.925 percent, drawing 3.05 times the bids as the amount sold, the highest level since August 2000. Auctions of 10- and three-year notes also drew stronger-than-average demand as investors sought refuge.

The Fed purchased $2.5 billion of Treasuries today due from 2036 to 2041 and bought $4.6 billion of the securities maturing from 2020 through 2021 as part of a program to lower borrowing costs, according to the New York Fed’s website.

The central bank is replacing $400 billion of shorter maturities in its holdings of Treasuries with longer-term debt in a plan that traders call Operation Twist.

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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