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Treasuries Rise as European Sovereign Debt Repair Is Elusive

Treasuries advanced as European leaders struggled to agree on a coordinated approach to supporting banks crippled by the sovereign-debt crisis, stoking demand for refuge.

U.S. 10-year yields dropped the most in a week since August as governments await further details of Europe’s week-old rescue package before they commit cash, German Chancellor Angela Merkel said today on the final day of a Group of 20 summit in Cannes, France. Greek Prime Minister George Papandreou faces a confidence vote tonight amid political turmoil. U.S. debt yields briefly rose after the government’s payrolls report showed the unemployment rate for the world’s largest economy unexpectedly decreased to a six-month low.

“It’s more fear and concern in Europe,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of 21 primary dealers that trade Treasuries with the Federal Reserve. “There are repercussions throughout the whole system. People may not want to go home short.” A short is a bet the price of a security will drop.

Yields on 10-year notes decreased four basis points, or 0.04 percentage point, to 2.03 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The yield rose earlier as much as six basis points. The 2.125 percent securities maturing in August 2021 gained 11/32, or $3.44 per $1,000 face amount, to 100 26/32. The yield dropped 28 basis points, the most on a weekly basis since Aug. 12.

Thirty-year bond yields fell three basis points to 3.09 percent after rising as much as six basis points. The yield dropped 28 basis points on the week, the most since Sept. 23.

Bond Returns

Treasuries have returned 8.5 percent this year, the most since U.S. government debt returned 14 percent in 2008 in the midst of the financial crisis, according to Bank of America Merrill Lynch index data.

Volatility in the Treasury market has remained above the 93.13 average for this year. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two- to 30 years, was 109 yesterday, almost at this year’s high of 117.8 reached on Aug. 8. It touched the year’s low of 71.5 on May 31.

The 10-year yield will advance to 2.24 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

The U.S. plans to auction $32 billion of three-year notes on Nov. 8, $24 billion of 10-year debt on the following day and $16 billion of 30-year bonds on Nov. 10.

Greek Politics

Greece’s largest opposition party rebuffed Papandreou’s overtures to form a national unity government, raising the prospect of elections that could delay aid needed to prevent default. Papandreou scrapped a referendum on a bailout accord with the European Union to avert a split in his party before a confidence vote.

Papandreou’s inability to resolve the political gridlock pushes the country closer to the first default by an EU nation even as his scrapping of the referendum averted potential ejection from the 17-member euro region.

Italian 10-year bonds slid, pushing the yield as much as 21 basis points higher to 6.404 percent, the most since the euro was introduced in 1999.

“It just plays into the whole mindset that nothing is being done,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, a primary dealer. “The market will remain skittish.”

Insurance Costs

The cost of insuring against default on European sovereign debt rose, reversing an earlier decline, according to traders of credit-default swaps.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose six basis points to 324 at 3 p.m. in London. An increase signals deteriorating perceptions of credit quality.

Treasuries briefly dropped following the U.S. employment report. The 80,000 increase in October payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington. The unemployment rate fell to 9 percent from 9.1 percent.

Pacific Investment Management Co.’s Bill Gross said the U.S. is in an “anemic, jobless recovery” where there is little real wage growth after the payrolls report showed employment rose at the slowest pace in four months.

The firm has a “little more dour outlook” than the Fed when it comes to growth, Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Soros View

Billionaire investor George Soros said Greece faces the danger of a disorderly default, raising the specter of a run on lenders in other countries. Any Greek debt reduction “must be done in an orderly manner” and authorities need to ensure that Greek banks are “kept alive” and deposits are safe, Soros said in a speech in Budapest yesterday.

“There’s a real danger of a disorderly default,” Soros said. Without support for the lenders, “you’re liable to have a run on the banks in other countries as well. That’s the danger of a meltdown.”

U.S. economic data have been better than forecast, though the improvement is slow, he said. The Citigroup Economic Surprise Index, which shows whether U.S. data beat or fell short of forecasts, has climbed to 13.6 from this year’s low of negative 117.2 in June.

The Fed announced in September it would replace $400 billion of short-maturity U.S. debt with longer-term securities to contain borrowing costs. It purchased $5 billion of Treasuries due from 2017 to 2019 today under the program, according its website.

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