Treasuries Advance as Fitch Rating Says ECB Should Step Up Bond Purchases

Treasuries increased as Fitch Ratings said the European Central Bank should step up government bond purchases to combat the euro region’s debt crisis, encouraging demand for a U.S. refuge.

America’s debt securities advanced before the $21 billion auction of 10-year notes as stock-index futures dropped and yesterday’s three-year offering produced the highest demand ever. A gauge of inflation expectations over the next 10 years fell to a one-week low.

“The primary market sentiment is still very positive,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “Yesterday’s auction went very well. The Fitch comments had a little bit of an impact.”

Yields on benchmark 10-year notes fell three basis points, or 0.03 percentage point, to 1.94 percent at 8:23 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities due in November 2021 rose 9/32, or $2.81 per $1,000 face amount, to 100 17/32.

The Stoxx Europe 600 Index decreased 0.6 percent, while futures on the Standard & Poor’s 500 Index expiring in March decreased 0.3 percent.

The ECB needs to be more “actively engaged,” David Riley, head of the sovereign-debt unit at Fitch, said at an event in Frankfurt today.

Demand for Treasuries as a haven has pushed debt due in 10 years or longer up 28 percent in the past 12 months, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Ten-year yields fell more than 140 basis points in 2011 as Europe’s debt crisis intensified.

German Economy

Germany’s economy shrank “roughly” 0.25 percent in the fourth quarter, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate.

Federal Reserve Bank of Cleveland President Sandra Pianalto said the economic recovery faces “headwinds” such as “depressed” housing markets, the sovereign-debt crisis in Europe and government spending cuts.

“Despite our current accommodative monetary policy, the recovery from the recent financial and economic crisis has been frustratingly slow,” Pianalto said in Wooster, Ohio. “Going forward, I will continue to weigh the costs and benefits of further policy actions.”

Break-Even Rate

The spread between yields on 10-year notes and Treasury Inflation Protected Securities, known as the break-even rate, narrowed to 2.06 percentage points. The spread earlier shrank to 2.05 percentage points, the smallest since Jan. 4.

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs under a plan announced in September. The central bank is scheduled to buy as much as $2.75 billion of Treasuries maturing from February 2036 to November 2041 as part of the program today.

U.S. unemployment unexpectedly fell in December to 8.5 percent, the least since February 2009, the Labor Department said last week. Manufacturing expanded at the fastest pace in six months, another report showed.

Sales at U.S. retailers probably rose in December, economists said before a report tomorrow. The projected 0.3 percent gain in purchases would follow a 0.2 percent advance in November, according to the median forecast in a Bloomberg News survey before Commerce Department figures.

Yield Outlook

The U.S. 10-year yield will climb to 2.63 percent by year- end, according to the average forecast in a Bloomberg News survey of financial companies, with the most recent forecasts given the heaviest weightings.

The Treasury’s $32 billion three-year note sale yesterday drew bids for 3.73 times the amount offered, the most since at least 1993.

The 10-year notes scheduled for sale today yielded 1.96 percent in pre-auction trading, compared with the all-time low of 2 percent in the Sept. 13 auction. Investors bid for 3.53 times the amount of debt offered last month, the most since April 2010.

The government is scheduled to conclude this week’s supply with a $13 billion sale of 30-year bonds tomorrow. It will announce tomorrow that it will auction $14 billion of 10-year inflation-protected securities on Jan. 19, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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