Treasuries Fall for Third Day on Greek Debt Agreement

Treasuries Drop on Greek Aid Package
The Federal Reserve is 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. Photographer: Brendan Smialowski/Bloomberg

Treasuries dropped for a third day after European finance ministers agreed on a second bailout package for Greece aimed at staving off default and keeping the 17-nation euro area intact.

Two-year yields traded at almost the highest level since October as the Treasury prepared to sell $35 billion of the securities today in the first of three note auctions this week. Yields on 10-year debt still remain more than a percentage point below their five-year average on speculation the Federal Reserve will maintain efforts to stimulate the economy.

“It’s a little bit of a selloff, with some optimism over Europe maybe working its way out,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of primary dealers that are required to bid at the auctions. “It’s clearly not an endgame, they’re still going to be dragging this thing out, instead of there being some definitive end to the crisis.”

Yields on 10-year notes rose five basis points, or 0.05 percentage point, to 2.05 percent at 11:02 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 fell 13/32, or $4.06 per $1,000 face amount, to 99 18/32. The yield reached the most since Feb. 9.

Two-year note yields were at 0.29 percent after reaching 0.30 percent, almost the highest since Oct. 28.

Market Reaction

“Treasury yields are up slightly due to the Greek bailout, yet it’s a pretty mild reaction,” said Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank’s TD Securities Inc. in New York. “There was some outride risk going into the weekend that some countries like the Netherlands and Finland weren’t going to go ahead with the bailout, but they decided to give Greece the cash. Overall, Treasury yields are still holding in ranges.”

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a reflection of traders’ outlook known as the break-even rate, reached 2.31 percentage points, the highest since August.

The two-year notes being sold today yielded 0.29 percent in pre-auction trading, compared with 0.25 percent at the previous sale on Jan. 24.

Investors bid for 3.75 times the amount of available debt last month, versus the average of 3.49 for the past 10 auctions. Indirect bidders, the category of buyers that includes foreign central banks, purchased 32.9 percent.

Debt Sales

The government is also scheduled to auction $35 billion of five-year notes tomorrow and $29 billion of seven-year securities on Feb. 23.

Treasuries have lost 0.5 percent this year, while company debt has gained 2.5 percent, according to Bank of America Merrill Lynch indexes.

Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, maintained their bearish stance on Treasuries. Ried’s index on the outlook through June slid to 43 for the seven days ended Feb. 17 from 44 the previous week. A figure below 50 shows investors expect U.S. government debt to drop.

The Fed is 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.

Fed Operations

The U.S. central bank sold $8.6 billion of securities due from December 2012 to May 2013 today under the program, according to the New York Fed’s website. Fed Chairman Ben S. Bernanke has pledged to keep the target for overnight lending between banks at virtually zero until at least late 2014.

U.S. home sales climbed in January to the highest level since May 2010, economists said before reports this week. Combined purchases of new and existing houses increased to a 4.97 million annual rate from 4.92 million in December, according to Bloomberg News surveys. Existing-home sales figures are scheduled for release tomorrow, and a report on new-home sales will be published Feb. 24.

“The tendency is that the markets are relieved by the Greek situation,” said Viola Stork, a fixed-income strategist at Helaba Landesbank Hessen-Thueringen in Frankfurt. “We’ve seen rather strong data, but at the moment the Federal Reserve is keeping a loose monetary policy. As long as we see modest reactions from the Fed, yields will remain anchored at lower levels.”

Yield Levels

Ten-year note yields are 37 basis points above the record low of 1.67 percent and 1.85 percentage points less than the average over the past decade even after the government increased the publicly traded debt to a record $10.1 trillion. The 10-year yield has averaged 3.41 percent since Feb. 21, 2007.

Timothy F. Geithner, who took over the Treasury Department in the midst of the worst financial crisis since the Great Depression, oversaw an almost doubling of U.S. public debt and presided over the loss of the nation’s AAA rating. He has done better for investors than Robert Rubin, while falling short of predecessor Henry Paulson.

Euro-area finance ministers meeting in Brussels awarded 130 billion euros ($172 billion) in aid to Greece. The plan includes a 53.5 percent writedown for investors in the nation’s bonds, Luxembourg Prime Minister Jean-Claude Juncker told reporters. The euro strengthened as much as 0.4 percent to $1.3293, the highest since Feb. 9, before dropping 0.3 percent.

Officials also held out the prospect of boosting the backstop for future fiscal emergencies to 750 billion euros from a planned limit of 500 billion euros when a permanent aid fund is paired with the temporary fund starting in July. A summit on March 1-2 may deliver a “significant reinforcement of the euro-area firewall,” Juncker said.

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