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Treasuries Rise on Concern Irish Financial Crisis Deepening

Treasuries rose on concern the sovereign-debt crisis is deepening in Ireland, encouraging demand for the safety of government securities.

U.S. notes and bonds extended gains as a report showed an unexpected drop in American consumer confidence. John Gormley, leader of Ireland’s Green Party, said in an interview with Dublin’s RTE Radio that the country’s bond spreads would widen if Ireland considered renegotiating with bondholders of nationalized Anglo Irish Bank Corp.

“There’s a bank issue there that isn’t going away,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. “It coincides with the fact that we bounced off some significant levels here.”

The 10-year note yield dropped 5 basis points, or 0.05 percentage point, to 2.72 percent at 10:37 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 gained 13/32, or $4.06 per $1,000 face amount, to 99 6/32.

The benchmark note’s yield was headed for a weekly drop of 8 basis points in what would be its first five-day decrease since Aug. 20. It touched 2.85 percent on Sept. 13, the highest level since Aug. 6.

The 2-year note yield slid 1 basis point to 0.47 percent, compared with the record low of 0.45 percent reached on Aug. 24. It was poised for a weekly drop of 10 basis points, the biggest since May 7. The 30-year bond yield dropped 5 basis points, paring its gain for the week to 2 basis points.

U.S. Sentiment

Treasuries remained higher after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly dropped to 66.6 in September from 68.9 in the previous month. The median forecast of 65 economists in a Bloomberg News survey was for an increase to 70.

A gauge of consumer prices excluding food and energy was unchanged in August after a 0.1 percent increase in the previous month. Consumer prices including those volatile items rose 0.3 percent for a second month.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a measure of expectations for consumer prices, narrowed to 1.8 percentage points. The five-year average is 2.1 percentage points.

“The soft set of inflation data is supporting the Treasury market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The trend is a bit higher and a reversal of what we’ve seen.”

Producer Prices

Longer-term U.S. debt dropped yesterday after the Labor Department reported that producer prices climbed more than economists forecast, rising 0.4 percent in August after gaining 0.2 percent in the previous month. Inflation erodes the value of fixed-income securities.

The extra yield investors demand to hold 10-year Irish debt compared with benchmark German bunds and the cost of protecting Irish government debt from default increased to a record.

Ireland’s government may need external assistance if there are additional financial-sector losses or the economy worsens, Antonio Garcia Pascual and Piero Ghezzi, economists in London at Barclays Plc, wrote in a note yesterday.

“At this juncture” given the comfortable near-term liquidity position of the Irish treasury, there isn’t a need to draw on financial assistance, they wrote.

A spokesman for Ireland’s Finance Ministry said via e-mail that there’s “no truth in a rumor” that the government may ask for external aid for its finances.

Two-year notes outperformed longer securities this week as traders speculated that the Bank of Japan will use dollars acquired in its yen sales to buy the safest Treasuries. Japan intervened to weaken the yen two days ago for the first time since 2004 as the currency’s surge to a 15-year high versus the dollar imperiled the Asian nation’s export-led recovery.

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