Treasuries Fall as Greek, Italian Leaders Seek to Tackle Crises

Treasuries fell, extending last week’s decline, amid speculation new Greek and Italian governments will face challenges in their efforts to tackle Europe’s debt crisis.

Demand for the relative safety of U.S. bonds waned after Prime Minister Lucas Papademos took charge as head of an interim Greek government and Mario Monti, a former European Union commissioner, agreed to be Italy’s new leader. The extra yield that U.S. 10-year notes offer over same-maturity German bunds widened to 24 basis points from 17 basis points last week.

Yields “are slightly higher but there still is a number of hurdles to clear,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There is more clarity in the Italian and Greek politics but nonetheless there has to be substance to the actions taken by politicians.”

The 10-year yield was two basis points, or 0.02 percentage point, higher at 2.08 percent at 10:14 a.m. London time, after touching a two-week high of 2.14 percent, according to Bloomberg Bond Trader prices. The 2 percent security due November 2021 fell 6/32, or $1.88 per $1,000 face amount, to 99 9/32. The rate rose two basis points last week.

Greece’s Papademos said yesterday the country’s new government must implement decisions from an Oct. 26 European summit and tackle unemployment. Greece needs to receive a sixth loan installment of 8 billion euros ($11 billion) before it runs out of money in mid-December.

Fed Buying

Monti, an economist, will try to reassure investors that Italy can cut its 1.9 trillion-euro debt burden and spur economic growth. European Central Bank Governing Council member Jens Weidmann today said euro-area governments should take responsibility for solving the sovereign crisis.

Yields on 10-year U.S. notes are about 41 basis points above the record low of 1.67 percent set on Sept. 23.

The Federal Reserve plans to purchase as much as $2.75 billion of Treasuries due from 2036 to 2041 today, according its website. The central bank announced in September it would replace $400 billion of short-maturity debt with longer-term securities to contain borrowing costs.

With the market for U.S. bills poised to shrink by the most since early 2010, a lack of the shorter-term securities will help keep government borrowing costs down.

Financing Strategy

The Treasury will issue about $72 billion less debt due within 12 months than it retires in December and January, bond strategists at New York-based JPMorgan Chase & Co. estimate. The contraction partly reflects a surge in corporate tax receipts that the Treasury receives this time of year, lessening its need to borrow.

The shrinkage underscores a shift in the financing strategy of the government, which boosted bills outstanding to a record $2.07 trillion in August 2009 as it raised cash to help the nation’s banks amid the worst financial crisis since the Great Depression. As those stresses abated, the amount has dropped to $1.48 trillion, or about 15 percent of all Treasuries, the smallest percentage in almost half a century, driving investors to securities maturing in more than a year.

“People have no choice,” said Eric Pellicciaro, the head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets. Demand for short-term notes “is expected to remain extremely strong mostly as alternatives to place cash have diminished,” he said in a telephone interview on Nov. 10.

Less Bearish

Investors became less bearish on their outlook for U.S. debt through year-end, according to a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest interdealer broker.

The company’s index of investor sentiment rose to 47 for the seven days ended Nov. 10 from 46 the week before. A figure less than 50 indicates investors expect prices to fall.

Treasuries have handed investors a 0.6 percent return this month as of the end of last week, versus a 1.4 percent gain in German bunds, Bank of America Merrill Lynch data show. Japanese government debt increased 0.5 percent.

The MSCI All Country World Index of stocks dropped 0.9 percent during the period, after accounting for reinvested dividends, according to data compiled by Bloomberg.

Demand for Treasuries waned before government and central bank reports this week that economists said will point to improvement in the world’s largest economy.

“Data will be important, it’s what Treasuries are looking at at the moment,” Credit Agricole’s Green said. “How equities are behaving as well is a key driver of the market.”

Retail sales rose 0.3 percent in October, according to the median forecast in a Bloomberg News survey before Commerce Department figures tomorrow. That would follow a 1.1 percent gain in September that was the biggest in seven months. Industrial production climbed 0.4 percent in October, twice as much as the previous month, a separate survey showed before the figures are released on Nov. 16.

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