Treasuries Rise as Italian Debt Concern Spurs Demand for Safety

Treasuries advanced as Italy’s Prime Minister Silvio Berlusconi faced calls to step down amid concern the nation will struggle to pay its debts.

Notes extended gains as Italy’s 10-year yields reached 6.74 percent, a euro-lifetime high, on signs the government was unraveling. The U.S. is scheduled to sell $32 billion of three-year notes today, $24 billion of 10-year securities tomorrow and $16 billion of 30-year bonds in two days.

“Europe’s debt problem is a positive buying catalyst for Treasuries,” said Tomohisa Fujiki, a rate strategist in Tokyo at a unit of BNP Paribas SA. “Italy’s 10-year yields over 6 percent may be unsustainable for continuous refunding.”

Yields on 10-year notes fell three basis points, or 0.03 percentage point, to 2.01 percent at 8:09 a.m. London time, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 added 1/4, or $2.50 per $1,000 face value, to 101. Five-year yields dropped two basis points to 0.88 percent after reaching 0.84 percent yesterday, the least since Sept. 23.

The extra yield investors demand to hold Italy’s 10-year bonds instead of similar-maturity Treasuries climbed to 4.68 percentage points, the fourth-highest among bond markets for euro-region nations, after Greece, Portugal and Ireland.

Key Vote

Berlusconi plans to stake the survival of his government on a confidence vote next week on implementation of measures pledged to the European Union that aim to boost growth and trim the region’s second-largest debt. The first test comes today on a normally routine vote to rubber-stamp last year’s budget report that may indicate whether Italy’s prime minister still has a majority in the 630-seat Chamber of Deputies.

Europe’s credit concerns pushed the MSCI Asia Pacific Index of shares down 0.8 percent, spurring demand for safer securities such as Treasuries and Japanese government bonds.

Japan’s 10-year yield fell one basis point to 0.975 percent at Japan Bond Trading Co., the lowest since Oct. 6.

The Federal Reserve will buy as much as $5 billion of debt today due from November 2019 to August 2021 under its program to lower borrowing costs. The Fed began its Maturity Extension Program, known as Operation Twist, in October and plans to buy $400 billion in longer-term maturities by the end of June 2012.

Fed Bank of Dallas President Richard Fisher would oppose any additional easing even after backing the Fed’s Nov. 2 pledge to try to reduce borrowing costs, Reuters reported yesterday.

“I didn’t support those programs and I haven’t changed my mind,” Fisher was quoted as saying in an interview with Reuters. “We didn’t take any new steps, and to me, that’s progress.”

Monetary Policy

Fisher dissented at the Federal Open Market Committee’s meeting in September when policy makers decided to lengthen the maturity of the central bank’s bondholding. He also opposed the committee’s pledge in August to keep the benchmark U.S. interest rate low through at least mid-2013.

The central bank may hold off easing further until there’s more evidence of a stalling economy, said BNP’s Fujiki.

The Reuters/University of Michigan preliminary index of U.S. consumer sentiment rose for a third month in November, according to the median estimate of a Bloomberg News survey of economists taken before the data are released on Nov. 11.

“It’s difficult for the Fed to introduce additional monetary easing now,” when economic statistics are holding up well, Fujiki said. “Because yields are low, there’s a bit of caution in the market toward the auctions this week.”

Three-year Treasury notes to be sold today yielded 0.39 percent in pre-auction trading, dropping from the 0.54 percent at the prior sale on Oct. 11.

Investors bid for 3.3 times the amount for sale at the October sale, 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 the 10-sale average of 35.9 percent.

Direct bidders, non-primary dealers buying for their own accounts, purchased 7.8 percent of the notes, the least since December 2009.

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