Treasury Yields at Almost Lowest of Year on Debt Debate

Treasuries rose for a third day, pushing yields to almost the lowest this year, as demand for the safest assets was boosted by speculation a political showdown over the U.S. debt limit will slow the world’s biggest economy.

Benchmark 10-year yields dropped after Treasury Secretary Timothy F. Geithner said a failure to increase the debt ceiling by early March would “impose severe economic hardship.” Such lack of action by lawmakers would prompt a “formal review” of the U.S. credit ranking, Fitch Ratings said in a press release. Wholesale prices dropped for a third month, indicating little risk of a pickup in inflation and allowing the Fed to keep adding monetary stimulus without triggering a surge in prices. Rates on Treasury bills rose to the highest since November.

“We are in a low-rate environment,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “It’s hard to make the argument for growing gross domestic product when taxes have been raised, and with spending cuts and the debt-ceiling uncertainty ahead. The Fed is still driving the market.”

The 10-year yield declined one basis point, or 0.01 percentage point, to 1.83 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The yield touched 1.81 percent, the lowest since Jan. 2. The 1.625 percent note due in November 2022 rose 3/32, or 94 cents per $1,000 face amount, to 98 4/32.

Thirty-year yields fell one basis point to 3.03 percent after touching 2.99 percent, the least since Jan. 2.

Bill Rates

Rates on Treasury bills maturing around the time the U.S. is forecast to run out of money to pay its obligations are higher than those on longer-maturity securities, suggesting investors are concerned lawmakers may fail to agree to lift the debt ceiling.

Feb. 28 bill rates rose to 0.108 percent, an increase of 2 basis points, or 0.02 percentage point, and the highest since Nov. 14. That compares with 0.08 percent for bills due April 18. At the end of last year, the April bills yielded 7 basis points more than the February securities.

U.S. government securities traded at the most expensive level since Jan. 1. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, touched negative 0.77 percent, the average for 2012, after reaching negative 0.67 percent on Jan. 3, the least costly level since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Debt Ceiling

With as little as a month until the U.S. runs out of money to pay its bills, President Barack Obama warned Republicans in Congress yesterday not to use the need for a debt-limit increase to force through new spending cuts. Obama insisted he won’t negotiate on raising the debt ceiling because the U.S. has no choice other than to pay for spending it has authorized. Many Republicans in Congress say a boost in borrowing authority must be linked to spending cuts.

“I don’t think people are thinking that we’re going to just fail -- it’s a temporary thing,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Under any circumstance, we can pay the debt. The question is the politics of it.”

‘Right Direction’

The Treasury Department has been using emergency measures since the end of December to prevent a breach of the $16.4 trillion debt limit. In a letter yesterday to House Speaker John Boehner, Geithner said the department expects to exhaust those measures “between mid-February and early March.”

As the U.S. government spends more than it receives in taxes and other revenue, the debt limit is the total dollar amount the U.S. is allowed to borrow to pay its bills. Such borrowing can be used only to pay for spending authorized by Congress.

The limit was periodically raised since its creation in 1917. Congress increased the debt ceiling to reflect the cost of World War II, and lowered the level after the war ended. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department.

Fitch Ratings said its AAA credit rankings on France and the U.K. are also likely to come under pressure this year due to slow economic growth and high debt levels.

The global bond market disagreed with Moody’s Investors Service and Standard & Poor’s more often than not last year when the companies told investors that governments were becoming safer or more risky. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg.

Treasuries have dropped 0.4 percent in the first two weeks of January, Bank of America Merrill Lynch indexes show, after returning 9.79 percent in 2011 and 2.2 percent in 2012.

To contact the reporters on this story: Susanne Walker in New York at swalker33@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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