Treasuries Gain After Moody’s Says It Will Review Europe Ratings

Treasuries rose after Moody’s Investors Service said it will review ratings for all European Union countries, citing a failure to produce “decisive” measures to end the region’s debt crisis at a summit last week.

Longer-term U.S. debt gained as Italian and Spanish sovereign bonds led declines among higher-yielding European sovereign debt. Germany’s top central banker damped bets the European Central Bank will extend its role to help end the crisis. U.S. sales of notes, bonds and inflation-linked debt over the next two weeks will probably total $177 billion, the largest concentration of duration supply ever, according to JPMorgan Chase & Co.

“There’s concern that there was no real decisiveness about Europe over the weekend,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That’s caused selling in peripheral debt, and it’s leading to buying in Treasuries.”

Yields on U.S. 30-year bonds fell six basis points, or 0.06 percentage point, to 3.05 percent at 11:30 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 increased 1 1/8, or $11.25 per $1,000 face amount, to 101 15/32. The yields climbed eight basis points last week and 11 basis points the week before that.

Ten-year note yields slid six basis points to 2.01 percent, compared with the record low of 1.67 percent reached Sept. 23.

‘Where’s the Beef?’

“It’s still very much a crisis,” said David Ader, head of government-bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “There’s a bit of a statement in the wake of the EU summit. People are saying, ‘Where’s the beef?’ There really isn’t that much there.”

Italian 10-year note yields climbed as much as 43 basis points today to 6.79 percent, the highest level since Dec. 1, before paring losses to 6.54 percent as the ECB was said to buy the nation’s securities. Spanish 10-year rates rose as much as 32 basis points to 6.07 percent, also the highest level since Dec. 1, before slipping to 5.89 percent.

Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Sonntagszeitung that while a European agreement on Dec. 9 to limit budget deficits represents “progress,” the onus is on governments rather than the ECB to resolve the crisis with financial backing. The interview was published yesterday.

The summit accord is “insufficient,” Mohamed El-Erian, who is Pacific Investment Management Co.’s co-chief investment officer along with Bill Gross, said in an interview with the French newspaper Les Echos.

U.S. Debt Returns

U.S. government debt has returned 8.9 percent this year, including reinvested interest, Bank of America Merrill Lynch indexes show. That compares with the 1.8 percent return on the Standard & Poor’s 500 Index when dividends are included.

The rally in Treasuries has accelerated since October even as U.S. reports showed improvements in everything from consumer confidence to jobless claims to manufacturing.

While government debt usually suffers as a strengthening economy spurs inflation and encourages investors to take bigger risks with their money, this recovery has been different because Europe’s sovereign-debt crisis has elevated the stress in the global financial system, bolstering demand for safety.

This week’s U.S. debt sales will consist of $78 billion in notes, bonds and inflation-linked debt in auctions that start today with an offering of $32 billion of three-year notes. The Treasury will announce on Dec. 15 how much it plans to raise in three note offerings starting Dec. 19.

“The only other time in recent memory that the Treasury held six nominal auctions in consecutive weeks was in April/May 2009, when the market priced in a significant supply concession,” wrote Terry Belton, head of U.S. debt strategy at JPMorgan, in a report Dec. 9.

Duration Supply

Duration supply, based on weighting Treasury securities by their sensitivity to changes in yield, increases as the U.S. sells more long-term debt. The sales planned through Dec. 21 are equivalent to issuing $114 billion of 10-year notes using this measure, according to JPMorgan. The firm is one of the 21 primary dealers obliged to participate in auctions.

Volatility in the Treasury market has increased. Bank of America Merrill Lynch’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose on Dec. 9 to 99.9 basis points, the highest in more than a week, and above the 2011 average of 94 basis points. The gauge reached a high of 117.8 basis points on Aug. 8, three days after S&P lowered the U.S. credit rating.

The three-year Treasury notes to be sold today yielded 0.36 percent in pre-auction trading, dropping from 0.379 percent at the prior sale on Nov. 8. The record low for an auction of the maturities was 0.334 percent on Sept. 12.

Fed Program

The Federal Reserve’s $400 billion program to replace shorter-term debt will reduce rates on longer-dated government debt, the Bank for International Settlements said. Yields on U.S. Treasuries with more than eight years to maturity may decrease about 22 basis points, Jack Meaning and Feng Zhu wrote in the Basel-based BIS’s quarterly report.

The Fed is replacing the shorter maturities with longer-term debt to cap borrowing costs in a plan it announced in September. The central bank bought $1.38 billion of Treasury Inflation Protected Securities today due from 2019 through 2041.

Additional stimulus “remains on the table,” Fed Chairman Ben S. Bernanke said after the Fed’s Nov. 2 meeting. Policy makers on the Federal Open Market Committee meet tomorrow.

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