Treasury 10-Year Yields Reach Two-Week High on U.S. Debt Outlook

Treasury 10-year note yields touched a two-week high after speeches by President Barack Obama and House Speaker John Boehner showed they still disagree on how to raise the borrowing limit.

Yields on two-year notes fluctuated after matching a two-week high before today’s $35 billion auction of the securities. The difference between yields on 10-year notes and inflation-linked debt reached to the widest since May on concern the U.S. credit rating may be lowered. The dollar fell to a record against the Swiss franc.

“Treasuries are grinding higher in accommodation for the supply, as well as the pricing in of the risk of a payment disruption and downgrade of the U.S. credit rating,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’re optimistic on the auction, given the broader support for Treasuries.”

Yields on 10-year notes increased one basis point, or 0.01 percentage point, to 3.01 percent at 8:50 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 fell 3/32, or 94 cents per $1,000 face amount, to 100 30/32.

The 10-year note yields touched 3.04 percent, the highest level since July 11. Two-year notes yielded 0.40 percent after touching 0.42 percent, matching the highest level since July 8.

‘Deep Economic Crisis’

Obama warned in a televised speech yesterday in Washington of a “deep economic crisis” unless Republicans and Democrats can agree on how to raise the $14.3 trillion federal borrowing limit and find accord on reining in future spending. Boehner, an Ohio Republican, who spoke afterwards from the U.S. Capitol, said Obama was asking for a “blank check.”

Earlier in the day, Boehner and the Democratic leader in the Senate, Harry Reid of Nevada, announced competing plans to raise the debt ceiling. Reid dropped Democrats’ insistence on tax increases, a move favored by Obama.

Treasuries with the longest maturities will have the biggest declines if the U.S. loses its top-level debt rating, said Pacific Investment Management Co.’s Bill Gross, who manages the world’s biggest bond fund, in a Twitter posting.

“Investors wonder what it will be in 2041!” wrote Gross, co-chief investment officer at Pimco, which is based in Newport Beach, California.

Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default on Aug. 2 unless the borrowing limit is increased. The impasse in Washington has increased the probability Standard & Poor’s will cut the U.S. credit rating from AAA within three months to 50 percent, the company reiterated July 21.

Default Swaps

It cost more to insure U.S. Treasuries for one year than for five years for the first time, as investors anticipated that a failure to raise the debt ceiling will prompt rating companies to declare the nation in default.

One-year credit-default swaps spiked to a record 80 basis points today, according to BNP Paribas SA, up from 46 basis points on July 22. The contracts now exceed five-year swaps by 23 basis points. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The dollar fell to a record low against the Swiss franc and approached its postwar low versus the yen as Obama and Boehner dueled over the budget limit. Spot gold climbed to a record high $1,624.07 an ounce yesterday.

Break-Even Rate

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, widened to as much as 2.49 percentage points, the highest level in more than two months.

The two-year notes being sold today yielded 0.425 percent in pre-auction trading, compared with 0.395 percent at the prior sale June 27. Investors bid for 3.08 times the amount of debt available last month, less than the average of 3.39 for the past 10 auctions.

Indirect bidders, the category of investors that includes foreign central banks, bought 22 percent of the notes at the June sale, the least since February 2008.

The Treasury is also scheduled to sell $35 billion of five-year debt tomorrow and $29 billion of seven-year securities on July 28.

The central bank is scheduled to buy $2.75 billion to $3.5 billion of Treasuries due from August 2018 to May 2021 today, according to the New York Fed’s website. The Fed is investing the principal payments from its debt holdings in Treasuries as part of its efforts to spur the economy.

Purchases of new U.S. homes probably stagnated in June, economists said before a report today. Sales grew 320,000 last month from a year ago, little changed from the 319,000 annual rate of the previous month, according to the median forecast of 71 economists in a Bloomberg News survey before today’s Commerce Department report.

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