U.S. 5-Year Notes Gain as Investors Assess Europe Debt Crisis

Treasuries maturing in five years and less gained amid concern European leaders have not taken needed actions to contain the region’s debt crisis, fueling demand for the safety of U.S. debt.

U.S. government securities maturing in 10 and 30 years fluctuated after paring earlier losses linked to reports of a new stability pact in Europe, which spurred gains in stocks. Treasuries were little changed after Fitch Ratings gave U.S. sovereign debt a negative outlook while affirming its AAA grade.

“The headlines out of Europe that may have created the risk-on trade are just that, headlines,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “We don’t have anything concrete yet. There’s a decoupling, for today” between markets assessing demand for riskier assets.

The five-year Treasury yield fell one basis point, or 0.01 percentage point, to 0.92 percent, at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 0.875 percent security maturing November 2016 rose 2/32 or 63 cents to 99 25/32.

Ten-year yields rose one basis point to 1.97 percent after reaching 2.08 percent, the highest since Nov. 14. Thirty-year yields advanced one basis point to 2.93 percent after rising to more than 3 percent for the first time since Nov. 18.

The Standard and Poor’s 500 Index rose 2.9 percent.

Fed Buys

The Federal Reserve purchased $4.68 billion of Treasuries due from 2020 to 2021 today as part of a plan announced in September to replace $400 billion in shorter maturities with longer-term securities in a bid to keep borrowing costs down.

Fitch’s outlook on the U.S. reflects declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming, the company said in a statement today. Standard & Poor’s and Moody’s Investors Service said Nov. 21 that the so-called supercommittee’s inability to reach an agreement didn’t merit a downgrade because the inaction will trigger $1.2 trillion in automatic spending cuts.

“The supercommittee’s failure reduced Fitch’s comfort in the political establishment to do something big in the near term,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed. “Still, the market expected it. The ball is in Washington’s court right now, but if one of the ratings agencies were to put the U.S. on review, that could have market impact.”

Trading Range

The 10-year yield has traded in a 28-basis-point range in November, with a high of 2.15 percent and a low of 1.87 percent. That compares with a 70-basis-point range the month before, with a high of 2.42 percent and a low of 1.72 percent.

U.S. 10-year debt yielded 33 basis points less than the similar-maturity bunds, the largest difference since April 2009.

German Finance Minister Wolfgang Schaeuble yesterday urged fast-track treaty changes to tighten budget discipline. “We can do that quickly and this will send an important signal to markets that the euro is and remains a stable currency,” he said yesterday in an interview with ARD television in Berlin.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning to introduce a new stability pact to counter the crisis, Germany’s Welt newspaper reported, without saying where it got the information.

Europe View

“Europe’s situation is as bad as everyone realizes,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York. “It’s a slow motion train wreck. It’s building momentum and there’s no good way to stop it.”

Treasuries have returned 1.2 percent this month as of Nov. 25, according to Bank of America Merrill Lynch indexes. U.S. debt has gained 9.2 percent this year, the most since 2008.

U.S. retail sales increased 16 percent to $52.4 billion during the Thanksgiving weekend, according to the National Retail Federation, citing a survey conducted by BIGresearch. The average shopper spent $398.62, up from $365.34 a year earlier.

The Institute for Supply Management’s factory index rose to 51.7 this month from 50.8 in October, economists surveyed by Bloomberg News projected before a Dec. 1 report. Readings over 50 indicate expansion.

Inflation Measure

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed two basis points to 1.97 percentage points.

“It looks like the U.S. economy still continues to grow at a modest pace and equity markets have seen a modicum of stability,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Against that backdrop, it’s difficult to see yields holding decisively below 2 percent unless the euro-area situation starts deteriorating again.”

The biggest bond dealers in the U.S. say the Fed is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.

Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June this year, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.

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