Treasuries Fall as Greek Unity Government Saps Demand for Refuge

Treasuries fell after Greek Prime Minister George Papandreou agreed to step down to allow the creation of a unity government and secure international financing, damping demand for the relative safety of U.S. debt.

Benchmark 10-year yields have climbed since touching the lowest level in a month last week when Papandreou canceled a planned referendum on Greece’s bailout package and worked to close an agreement on a new government before his nation runs out of money. The U.S. Treasury Department plans to sell $72 billion of notes over three days this week, beginning with an auction of three-year debt tomorrow.

“To the extent that this rules out some of the Armageddon-type potential like a referendum, it could work to buoy risk and hurt Treasuries,” said Gavin Stacey, chief interest-rate strategist at Barclays Plc in Sydney. “At the margin, it’s positive and therefore detrimental to the Treasury outlook.”

The yield on 10-year notes rose three basis points to 2.06 percent as of as of 6:45 a.m. London time, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 dropped 7/32, or $2.19 per $1,000 face amount, to 100 19/32. Thirty-year yields climbed three basis points to 3.12 percent. A basis point is 0.01 percentage point.

Japan’s 10-year yield was unchanged at 0.985 percent.

Greece’s Papandreou met with Antonis Samaras, the leader of the main opposition party, and “agreed to form a new government with the aim of leading the country to elections immediately after the implementation of European Council decisions on October 26,” according to an e-mailed statement yesterday from the office of President Karolos Papoulias in Athens.

Treasury Auctions

Both sides will convene again today to decide who will be the head of the administration with a separate meeting to discuss the timeframe and the new government’s mandate, according to the statement.

The U.S. will sell $32 billion of three-year notes tomorrow. The debt yielded 0.39 percent in pre-auction trading, dropping from the 0.544 percent at the prior sale on Oct. 11.

Investors bid for 3.3 times the amount for sale in October, more than the average of 3.21 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, bought 37.8 percent of the notes compared with 35.7 percent in the prior auction.

The Treasury is scheduled to sell $24 billion of 10-year notes on Nov. 9 and $16 billion of 30-year bonds on Nov. 10.

Pressure on Berlusconi

Declines in Treasuries were limited as investor attention shifts from Greece toward Italy, where Prime Minister Silvio Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow. Allies are pressuring Berlusconi to step aside after contagion from the region’s debt crisis pushed Italy’s borrowing costs to euro-era records.

“The problem is contagion to Italy which is several times larger than Greece,” said Hideo Shimomura, who helps oversee the equivalent of $79.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. “Long-term yields all over the world will still be at low levels.”

The median forecast of economists surveyed by Bloomberg News is for Treasury 10-year yields to rise to 2.24 percent by December and 2.35 in the first quarter of 2012.

Jobs Growth

The Federal Reserve plans to buy today $2.25 billion to $2.75 billion of debt maturing from February 2036 to August 2041 under its program to lower borrowing costs.

U.S. employers added the fewest workers in four months, a report Nov. 4 showed, reinforcing Fed Chairman Ben S. Bernanke’s prediction of a “frustratingly slow” recovery. Payrolls rose by a less-than-forecast 80,000, Labor Department data showed.

The number of applications for unemployment insurance payments rose to 400,000 last week from 397,000 in the prior period, according to the median forecast of economists ahead of Labor Department data also due Nov. 10. Claims have averaged 414,000 so far this year.

“The general risk-averse tone and the sense that we’re not going to see much growth is in the price,” said Russell Jones, the Sydney-based global head of debt strategy at Westpac Banking Corp., Australia’s second-largest lender. “Long-term rates in the U.S. are going to stay low for an extended period.”

The MSCI Asia Pacific Index of stocks fell as much as 0.6 percent.

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