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U.S. 30-Year Bond Gains Most in 1 Year on Debt Deal, Economy

Treasury 30-year bonds rallied the most in more than a year as the Senate approved a debt-limit increase and a report showed personal spending unexpectedly fell in June, reinforcing speculation the economy is slowing.

U.S. 10-year note yields reached the lowest this year as President Barack Obama signed a bill to raise the U.S. debt limit by at least $2.1 trillion, averting by hours a first-ever U.S. financial default, while investors cautioned the nation’s credit rating may be cut. Yields on Italian and Spanish bonds climbed as investors sought a refuge from Europe’s sovereign-debt turmoil.

“There’s so much uncertainty out there and negative economic news that we’ve seen continued moves in Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The Senate vote wasn’t a shocking move. What’s going on is a lot of nervousness.”

Yields on 30-year bonds dropped 17 basis points, or 0.17 percentage point, to 3.91 percent at 5:23 p.m. in New York, according to Bloomberg Bond Trader prices. It fell 18 basis points earlier to touch 3.9 percent in the biggest drop since May 2010. The 4.375 percent securities maturing in May 2041 rose 3 3/32, or $30.94 per $1,000 face amount, to 108 5/32.

Yield Quotes

The 10-year note yields touched 2.60 percent, the lowest since Nov. 9. The seven-day relative strength index of the 10-year note yield dropped below 30, indicating a reversal of direction may be imminent.

The yields on two-year notes decreased five basis points to 0.32 percent, or almost the record low of 0.312 percent reached Nov. 4.

The yield on 30-year bonds fell to within 3.61 percentage points of two-year securities, the narrowest since November, from the 2011 high of 4 percentage points reached Jan. 28.

Credit-default swaps on U.S. debt were 54.46 today, according to CMA. They closed at 62 on July 29.

The risk of a U.S. sovereign default remains “extremely low,” Fitch Ratings said. Still, the U.S. needs to confront “tough” choices on tax and spending against a weak economic backdrop if the budget deficit is to be cut to safer levels over the medium term, Fitch said.

Fitch said it expects to conclude its scheduled review of the U.S. sovereign rating by the end of August.

Bill Rates

Rates on the $90 billion in six-month bills due Aug. 4 dropped today to 0.025 percent. The rate rose to 0.3 percent on July 29, the highest since they were issued in February, on concern Congress wouldn’t raise the debt limit by the deadline of today.

“The market is ready to move on,” said Anthony Cronin, a trader in New York at Societe Generale SA. “More customers are coming into the bill market now that default has been taken off the table.”

Investors also sought the safety of government debt as the yield on 10-year Italian bonds rose to 6.25 percent, the most since 1997, amid concern slowing growth will hamper efforts to tame European debt loads. The yield on Spanish 10-year debt climbed to 6.46 percent, the most since 1997. German 10-year bund yields dropped to an eight-month low.

For all the anxiety among politicians and their constituents over playing chicken with the debt ceiling and the prospect of the first-ever downgrade of U.S. debt, the people with the most at stake made more money buying Treasury securities in July than any month this year. They made $183,000 for every $10 million invested.

Bond Buys

Investors from Argentina to New Zealand snapped up Uncle Sam’s bonds in the $9.34 trillion market. U.S. government debt returned 1.83 percent in July, about three times more than the rest of the global sovereign bond market, Bank of America Merrill Lynch index data show.

Treasury officials will keep the total of next week’s auctions of three-, 10- and 30-year securities at $72 billion as the government is close to passing a bill to raise its debt limit, primary dealers forecast.

The U.S. will sell $32 billion of three-year notes, $24 billion of 10-year debt and $16 billion of 30-year bonds next week, according to 16 of the primary dealers, which are required to bid in Treasury auctions. The amounts are the same as the grouping of auctions of these maturities sold in May.

Refunding Outlook

“It’s not clear that they necessarily need to raise or decrease the size of the auction, so leaving it the same is the best way to go for now,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer.

The Senate voted 74-26 for the debt-limit measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan yesterday.

Bill Gross, who runs the world’s biggest bond fund, at Pacific Investment Management Co., said the compromise reached by Congress won’t make a “significant dent” in the deficit.

“In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost,” Gross wrote in a monthly investment outlook posted on the Newport Beach, California-based company’s website today.

Credit Review

Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”

Consumer purchases decreased 0.2 percent in June, after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November and the savings rate climbed.

Employers failed to create enough positions in July to reduce joblessness, a separate survey showed before the Labor Department’s payrolls report Aug. 5.

“The data is disappointing,” Cronin said. “It reinforces the weak economic news we’ve gotten in the last week. The data will help to defend against any dip in prices.”

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