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U.S. 30-Year Yields Fall to Two-Week Low Amid Europe Concern

Treasury 30-year bonds climbed, pushing yields to a two-week low, as concern that Europe’s debt crisis will worsen bolstered the refuge appeal of U.S. government securities.

Treasuries erased earlier losses as the U.S. prepared to auction $13 billion of 30-year bonds after selling 10-year notes yesterday to the strongest demand in 20 months. The euro dropped below $1.30 for the first time since January as Italy had to pay the highest interest rate in 14 years at a five-year bond sale, underlining signs of increased funding stress in Europe.

“Concern about Europe is still at the forefront,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Federal Reserve. “We still have tremendous problems in Europe. I wouldn’t be surprised to see Treasuries rally to 1.75 percent over the next five weeks.”

Yields on 30-year bonds dropped seven basis points, or 0.07 percentage point, to 2.94 percent at 12:06 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.93 percent, the lowest level since Nov. 29. The 3.125 percent securities due in November 2041 climbed 1 13/32, or $14.06 per $1,000 face amount, to 103 5/8.

The benchmark 10-year yield fell five basis points to 1.92 percent and reached 1.91 percent, the lowest since Nov. 25.

Interest-Rate Spreads

The Fed sold $8.63 billion of Treasuries maturing from October 2012 to May 2013 as part of its program to replace $400 billion of short-term debt in its portfolio with longer-maturity securities in an effort to reduce borrowing costs further and counter rising risks of a recession.

U.S. interest-rate swap spreads, a measure of stress in credit markets, increased for a fourth day, the longest stretch in two months, on concern European leaders will struggle to contain the debt crisis.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield expanded as much as 3.6 basis points to 49.50 basis points, the widest since Nov. 30 on an intraday basis, according to data compiled by Bloomberg. The measure gains when investors favor the perceived safety of government bonds.

Stocks dropped, with the Standard & Poor’s 500 Index falling 1.2 percent and the MSCI World Index losing 1.7 percent.

The euro weakened to as low as $1.2946 as global investors fled euro-denominated assets on concern their value will drop.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, reached 1.47 percentage points below the euro interbank offer rate, the most expensive on an intraday basis since Nov. 30.

No Other Choice

“With this morning’s further slide in the euro, touching below 1.30 before the start of U.S. trading, those underweight the U.S. dollar may not have a choice of turning their noses up at 3.00 percent or lower yields,” Jim Vogel, interest-rate strategist at FTN Financial in Memphis, Tennessee, wrote in a note to clients.

German Chancellor Angela Merkel reiterated her opposition to euro bonds as a tool for dealing with the euro region’s debt crisis. Such securities “are not appropriate as a rescue measure,” she said today in a speech to parliament in Berlin.

“We’re on a slower time frame to get the next new development in the crisis as it unfolds,” Vogel said in an interview. “We’re not going to get any next-step developments out of Europe for the next three to four weeks. People thought the rebalancing toward Treasuries was done. Yesterday’s auction demonstrated a far deeper appetite for Treasuries relative to what people had anticipated.”

The 30-year bond yield fell today even as the auction of the securities loomed. Traditionally, traders will aim to push securities about to be sold lower.

Record Low Yield

The so-called long bonds due for sale today yielded what would be a record low 2.935 percent in pre-auction trading. Last month’s auction of long bonds drew a yield of 3.199 percent, and a record low of 3.12 percent was reached at the October sale. The bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount sold, was 2.4 at the November offering, versus an average of 2.65 at the past 10 auctions.

The U.S. sold $21 billion of 10-year notes yesterday, drawing a bid-to-cover ratio of 3.53, the highest since April 2010. The securities drew a yield of 2.020 percent, compared with a forecast of 2.050 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers.

The government’s $32 billion sale of three-year notes on Dec. 12 attracted a bid-to-cover ratio of 3.62, a record.

The Treasury will auction $12 billion of five-year Treasury Inflation Protected Securities tomorrow, when it also will announce how much it will sell next week in three note sales.

Maintaining Expansion

The Fed said yesterday after a policy meeting the U.S. economy is maintaining its expansion even as global growth slows. Fed Chairman Ben S. Bernanke signaled he’s concerned Europe’s crisis will hobble the U.S. expansion.

Federated Investors Inc., the $350 billion money manager, is switching from Treasuries to corporate bonds as the world’s largest economy shows signs of strength.

“We think it’s a more offensive time,” Joseph Balestrino, the firm’s chief market strategist for fixed income, said in an interview today on Bloomberg TV’s “InsideTrack” with Erik Schatzker. “Our data over the last two-plus months has been materially better than expectations.”

Italy had to pay the most since 1997 to sell five-year bonds. The Rome-based Treasury sold 3 billion euros ($3.9 billion) of the debt, the maximum for the sale, to yield 6.47 percent, up from 6.29 percent at the last auction on Nov. 14.

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