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Treasuries Drop as Obama Threatens to Veto Boehner’s Debt Plan

Treasuries fell, eroding a gain from yesterday, as President Barack Obama threatened to veto House Speaker John Boehner’s plan to raise the U.S. debt ceiling and reduce spending by $3 trillion.

The U.S. may have its top-level credit rating cut as politicians struggle to reach an agreement on how to increase the federal borrowing limit, a step needed to keep paying its debts, according to BlackRock Inc. and Loomis Sayles & Co. The Treasury is scheduled to sell $35 billion of five-year debt today, the second of three note auctions this week.

“There’s a concern, not only for a downgrade, but also for a default,” said Hideo Shimomura, who helps oversee the equivalent of $77 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest bank. “If there’s no accord, yields are going to rise.”

The 10-year yield climbed two basis points to 2.97 percent as of 7 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 fell 5/32, or $1.56 per $1,000 face amount, to 101 9/32. The budget stalemate hasn’t been enough to push the rate to its decade-long average of 4.05 percent.

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. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they may cut the nations top-level sovereign ranking if officials fail to resolve the stalemate.

Downgrade Threat

“Our guess is, when push comes to shove, the debt ceiling will be raised,” said Bob Doll, chief equity strategist at New York-based BlackRock, which manages $3.66 trillion. “What goes along with that is very difficult to tell, and that’s why the threat of a downgrade still exists,” Doll said in an interview today with Susan Li on Bloomberg Television’s “First Up.”

The rating may be cut because politicians probably won’t agree on a plan to reduce spending, said Kathleen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund.

Treasuries will “continue to be a large, liquid market whether it’s AAA or AA,” Gaffney, who is based in Boston, said yesterday in an interview with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.”

The fund returned 14 percent in the past year, beating 98 percent of its competitors, according to Bloomberg data.

Japanese Bonds

Japan’s 10-year yields declined 1.5 basis points to 1.08 percent, approaching 2011’s low of 1.06 percent set July 19.

The Ministry of Finance is selling more 10-year bonds to individuals than at any time in the past four years as higher payouts lure buyers, helping the government diversify its base of investors beyond domestic banks.

Purchases of securities aimed at individuals totaled 231.9 billion yen ($2.98 billion) in June, the highest level since July 2007, a Finance Ministry report showed this month. It was the first sale using a new formula to increase coupon payments for retail investors.

Yields indicate U.S. investors are increasingly favoring bank or company debt over Treasuries.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, narrowed to 18.7 basis points yesterday, the least since March.

Debentures from Wal-Mart Stores Inc., the largest retailer, and Paris-based utility EDF SA, both rated the second-highest AA level, are the best-performing investment-grade corporate securities globally this month through July 25, according to Bank of America Merrill Lynch index data.

An index of corporate debt with the same AAA rating that the U.S. is at risk of losing is outperforming Treasuries by 0.13 percent, the most since March.

Five-Year Sale

The five-year Treasuries being sold today yielded 1.54 percent in pre-auction trading, compared with 1.615 percent at the prior offering on June 28. Investors bid for 2.59 times the amount on sale last month, the least in a year.

Indirect bidders, the category of investors that includes foreign central banks, bought 37.6 percent of the notes, versus the 10-sale average of 40.3 percent.

The Treasury auctioned $35 billion of two-year debt yesterday, and will conclude this week’s offerings with $29 billion of seven-year notes tomorrow.

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