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Treasuries Gain Most in Six Weeks as Crisis Exit Eludes Europe

Treasuries advanced the most since early November as optimism that a summit a week ago would spur a resolution of Europe’s debt crisis faded amid political discord, fueling investor demand for U.S. government bonds as a refuge.

The benchmark 10-year note yield touched a two-month low yesterday as Fitch Ratings reduced France’s outlook and put the grades of nations including Spain and Italy on review for a downgrade. Moody’s Investors Service said Dec. 12 it will review all EU countries’ ratings. Record demand at this week’s Treasuries offerings added to optimism investor interest will remain strong at next week’s $99 billion in note sales.

“The appetite for Treasuries remains the biggest on the planet,” said Paul Montaquila, head of fixed-income trading in San Ramon, California, at Bank of the West. “The uncertainty about what’s going on in Europe is superseding everything else. Treasuries continue to be the No. 1 asset to have.”

Ten-year yields slid 21 basis points, or 0.21 percentage point, to 1.85 percent yesterday in New York, from 2.06 percent on Dec. 9, according to Bloomberg Bond Trader prices. It was the biggest drop since the five days ended Nov. 4. The yields touched 1.83 percent, the least since Oct. 5, approaching the record 1.67 percent low reached Sept. 23. The price of the 2 percent securities due in November 2021 increased 1 29/32, or $19.06 per $1,000 face amount, to 101 3/8.

Thirty-year bond yields fell 26 basis points this week to 2.85 percent and five-year yields dropped nine basis points to 0.80 percent in their biggest decreases since Nov. 4.

Yield Gap

The gap between yields on two- and 30-year securities narrowed for the first week since November, shrinking to 2.63 percentage points. The 2011 average is 3.5 percentage points.

The Treasury will sell next week $35 billion of two-year notes, the same amount of five-year debt and $29 billion of seven-year securities. The daily auctions begin Dec. 19. The amounts were unchanged from the last offerings of the maturities in November.

The government auctioned $12 billion in five-year Treasury Inflation Protected Securities Dec. 15 at a record low yield of negative 0.877 percent.

The offering capped the sale of $78 billion in notes, bonds and inflation-linked debt this week. The government auctioned $13 billion in 30-year bonds Dec. 14 at a record low yield of 2.925 percent, drawing 3.05 times more bids than the amount sold, the highest level since August 2000. Sales of 10- and three-year notes also drew stronger-than-average demand as investors sought refuge.

‘Few Places’

“People don’t feel comfortable being anywhere but in Treasuries,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “There are few places to park money that are safe. Supply doesn’t matter.”

Treasuries climbed yesterday after Germany’s Bundesbank said it saw no urgent need for a decision on a loan to the International Monetary Fund, suggesting the Dec. 19 deadline set by European Union leaders may be missed. EU leaders decided Dec. 9 at their summit to channel an additional 200 billion euros ($261 billion) in loans to the IMF to help fight the crisis.

“We want to evaluate the whole situation,” a spokesman for the Frankfurt-based Bundesbank said by telephone.

Luxembourg’s Jean-Claude Juncker, who leads a group of finance ministers from the region, said the EU should meet the deadline. Juncker also told reporters in Luxembourg yesterday the euro region is “on the brink of a recession.”

No Clarity

There’s no clarity on how Europe will resolve its crisis amid the region’s political turmoil, Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the Federal Reserve, said yesterday in an interview on Bloomberg Radio with Sara Eisen and Erik Schatzker.

“Treasuries are the beneficiaries of that,” Jersey said.

Fitch said yesterday a “comprehensive solution” to the euro-area crisis is “technically and politically beyond reach.” It changed its outlook on France to negative, while affirming its AAA rating. It also placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review, which it expects to complete by the end of January, according to a statement released in London.

Moody’s cut Belgium’s credit rating two levels to Aa3 yesterday, citing borrowing costs and slowing growth. The firm said earlier in the week the European summit offered few new measures and didn’t diminish the risk of rating revisions.

Standard & Poor’s said on Dec. 5 it expected to conclude a review of euro-area sovereign ratings “as soon as possible” after the summit.

Euro Drops

The euro slid for a second week as investors sought safety, dropping below $1.30 for the first time since January. Stocks dropped, with the Standard & Poor’s 500 Index down 2.8 percent.

U.S. two-year interest-rate swap spreads, a measure of stress in credit markets, increased yesterday to 51 basis points, the widest since Nov. 30 on an intraday basis, according to data compiled by Bloomberg.

The gap between what banks and the Treasury pay to borrow money for three months, known as the TED spread, was 57 basis points yesterday, the highest level since May 2009.

Treasuries have returned 9.9 percent this year, according to Bank of America Merrill Lynch’s Treasury Master index, headed for the highest gain on a yearly basis since 2008.

U.S. consumer prices stagnated last month, the Labor Department said yesterday. The data supported the Fed’s statement after a meeting this week that inflation has moderated even as stimulus measures began to sustain growth. The unchanged reading in the consumer-price index followed a 0.1 percent decline in October.

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the debt, narrowed yesterday for a fourth day, the longest stretch in a month, reaching 1.91 percentage points. The 10-year average is 2.13 percentage points.

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