Treasuries Decline as Support for Greece Debt Exchange Eases Refuge Demand

Treasuries (YCGT0025) fell as reports showed Greece is garnering enough support for the nation’s debt exchange to avoid a disorderly default and U.S. companies added more jobs last month.

Government bonds erased a portion of yesterday’s gains as data showed that investors with at least 58 percent of Greece’s debt will participate in the private-sector-involvement in a bailout of the country. Yields on benchmark 10-year notes yesterday declined the most this year. The report today from Roseland, New Jersey-based ADP Employer Services comes two days before U.S. data forecast to show nonfarm payrolls added more than 200,000 jobs in February for a third month.

“We are paring some of the risk-off trade from yesterday with the market clearly focused on PSI and what percentage of the Greek bondholders agree to the swap,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve.

Yields on 10-year notes rose three basis points, or 0.03 percentage point, to 1.98 percent at 5:07 p.m. New York time, according to Bloomberg Bond Trader prices. They fell seven basis points yesterday. The yields have traded between 1.79 percent and 2.09 percent in 2012. The 2 percent security maturing in February 2022 declined 9/32, or $2.81 per $1,000 face amount, to 100 7/32.

Thirty-year (USGG30YR) Treasury bond yields increased five basis points to 3.12 percent, after dropping eight yesterday.

The Standard & Poor’s 500 (SPX) Index rose 0.7 percent today after sliding 1.5 percent yesterday, the most since December.

Report on Fed

Treasuries stayed lower and stocks extended gains as the Wall Street Journal reported Fed officials are considering a bond-buying program designed to subdue concern about future inflation if they decide on new steps to boost the economy. The Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie it up by borrowing it back for short periods at low rates, the newspaper said, citing Fed officials.

The U.S. central bank is scheduled to hold a policy meeting on March 13.

Prices of federal funds futures contracts traded at the CME Group in Chicago fell on the possibly long-term debt purchases would be sterilized by draining short-term cash from the money markets. The June 2012 contract traded at 99.87 basis points, corresponding to a rate of 0.13 percent, compared to 0.12 percent yesterday.

The idea of the Fed sterilizing future debt purchases “certainly put some pressure on the federal fund futures contracts,” said Kenneth Silliman, head of U.S. short-term rates trading at Toronto Dominion Bank’s TD Securities unit in New York.

‘Rethinking the Need’

Forward repo, or repurchase agreement, rates also rose, “which reinforces the perception that repo rates will continue to move higher,” Silliman said. “After operation twist the Fed has very little securities in the front end, so sterilizing with reverse repos or term deposits would be a very logical option.”

“People believe the Fed is rethinking the need for additional liquidity at this point,” said James Collins, an interest-rate strategist in the futures group at Citigroup Global Markets Inc. in Chicago, a primary dealer.

U.S. 10-year notes have returned 0.02 percent this year through yesterday, according to a Bank of America Merrill Lynch index. Treasuries of all maturities have lost 0.1 percent, another Merrill Lynch index showed, compared with a full-year gain of 9.8 percent in 2011.

Bank of America Merrill Lynch’s MOVE (MOVE) index, which measures price swings based on options, fell to 75.1 after rising yesterday to 75.8 in its first gain in three days.

Volume Rises

About $244 billion of Treasuries changed hands today as of 5:01 p.m. in New York through ICAP Plc, the world’s largest interdealer broker, in the third straight daily increase. The average for the past five years is $269 billion.

European banks and insurers including BNP Paribas SA, Commerzbank AG and Assicurazioni Generali SpA are among bond holders that have pledged to accept the Greek debt-swap offer. That brings the total so far to at least 120 billion euros ($157 billion), based on data compiled by Bloomberg from company reports and government statements.

The goal is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent and turn the tide against Europe’s two-year-old crisis. The government is seeking at least 75 percent participation, and the swap offer expires tomorrow. The government said it will use collective-action clauses to compel holders of Greek-law bonds to accept the swap if enough holders consent to the deal.

“Adding up the commitments to participate in the Greek PSI, it is now clear that the CAC hurdles will very likely be cleared,” Christoph Rieger, Commerzbank AG head of fixed-income strategy in Frankfurt, said in a note today.

U.S. Payrolls

U.S. companies added 216,000 workers to their payrolls in February, according to data from ADP. The median projection of economists surveyed by Bloomberg News called for an advance of 215,000.

The Labor Department will report this week that U.S. nonfarm payrolls added 210,000 jobs last month, according to economists in a separate survey, compared with 243,000 in January and 203,000 in December.

A bigger increase in payrolls would “put more pressure on long-term Treasuries because the economy’s getting better,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “The risk- reward ratio is now skewed to being short Treasuries.” A short

Fed Purchase

The Fed bought $1.97 billion of Treasuries today maturing from February 2036 to May 2041. The central bank is in the process of swapping $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs.

The U.S. will announce tomorrow the size of three note-and- bonds auctions next week. It will probably sell $32 billion of three-year notes, $21 billion of 10-year securities and $13 billion of 30-year bonds, according to an estimate by Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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