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Treasury Yield Gap Narrows as Greek Debt Debate Damps Outlook

The difference between yields on Treasuries due in 10 and 30 years narrowed for the first time in three weeks amid concern European leaders have not taken enough steps to contain the region’s debt crisis.

Benchmark 10-year note yields rose for a second week while those for 30-year bonds were little changed as investors submitted fewer bids than the previous month at government auctions of both securities. Federal Reserve Chairman Ben S. Bernanke said yesterday that improvements in the U.S. housing market have been “frustratingly slow,” before the central bank releases minutes on Feb. 15 from its previous policy meeting.

“There’re still some skeptics about news there may be a solution to the Greek problem,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “In the absence of any significant data” this week, doubts about the pace of U.S. growth “are about what’s going on in Europe.”

The gap in yields between 10-year notes and 30-year bonds shrank to 1.15 percentage points from 1.20 percentage points last week, according to Bloomberg Bond Trader prices. The difference in yields between the two securities reached the widest since Sept. 20 on Feb. 3.

Benchmark Yields

Yields on 10-year notes rose six basis points this week, or 0.06 percentage point, to 1.99 percent in New York. The 2 percent securities maturing in February 2022 reached 100 1/8.

The 30-year bond yield rose two basis points to 3.14 percent.

The widening of the gap between 10- and 30-year yields “happened quite sharply since a few weeks ago once the data really started to get better,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. “I see it as a short-term pull-back in a longer-term rising trend.

The difference could reach 1.25 percentage points in the next month, Prakash said. It had been 1.02 percentage points at the end of 2011.

Hedge-fund managers and other large speculators decreased their net-short position in 30-year bond futures while increasing their net-short position in 10-year note futures in the week ending Feb. 7, according to U.S. Commodity Futures Trading Commission data.

Futures Bets

Speculative 30-year bond futures short positions, or bets prices will fall, outnumbered long positions by 11,817 contracts on the Chicago Board of Trade. Net-short positions fell by 5,364 contracts, or 31 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Speculative 10-year note futures short positions outnumbered long positions by 43,460 contracts. Net-short positions rose by 13,877 contracts, or 47 percent, from a week earlier.

Bidding at the government’s three note and bond offerings this week totaling $72 billion was weaker than similar sales last month. Treasury sold $16 billion of 30-year bonds Feb. 9 as the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.47, versus 2.6 at the January offering and an average of 2.66 for the previous 10 sales.

Treasury sold $24 billion of 10-year notes Feb. 8 and $32 billion of three-year notes Feb. 7.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed Feb. 9 at 83.2 basis points, up from 70.2 basis points reached Feb. 2 that was the lowest level since July 2007. The five-year average is 111.9 basis points.

Greek Talks

Treasuries gained yesterday for the first time in four days as European finance ministers withheld a rescue package for Greece pending the nation’s approval of fiscal austerity measures. Greek Prime Minister Lucas Papademos secured approval from his Cabinet to submit laws for new budget measures designed to secure a second rescue package for the country, according to a government official yesterday.

Greece’s Finance Minister Evangelos Venizelos said yesterday his euro-area counterparts declined to approve a 130 billion-euro ($171 billion) aid package for Greece at an emergency meeting because the government fell short on austerity demands.

“There are more worries that the Greek deal, that sounded good yesterday, has more bumps in the road,” Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, said yesterday.

Economic Data

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for February fell to 72.5 from 75 at the end of last month. Economists projected a reading of 74.8, according to the median estimate in a Bloomberg News survey.

Bernanke said efforts to spur economic growth are being blunted by impediments to mortgage lending, and he called for further steps to heal the housing market.

“We have helped lower mortgage rates to the lowest point in many, many decades,” Bernanke told homebuilders yesterday in Orlando, Florida. “Yet we are not seeing as much activity as we would like to see.”

The central bank announced Jan. 25 it will keep its target for overnight bank lending at virtually zero until at least late 2014. Bernanke said policy makers were considering buying bonds to sustain the expansion.

The Fed is in the process of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., boosted his holdings of Treasuries to the most since July 2010. Gross boosted the proportion of U.S. government and Treasury debt in Pimco’s $250.5 billion Total Return Fund to 38 percent in January from 30 percent in December, according to the company’s website.

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