U.S. 10-Year Yield Falls Most in 6 Weeks on Europe Crisis

Treasuries rose, pushing 10-year yields down the most in six weeks, amid concern a failure of European leaders to provide clarity on aid for Spain will prolong the region’s debt crisis, stoking refuge demand.

The yield on the 10-year note dropped from the highest level in a month as Spanish Prime Minister Mariano Rajoy said after a meeting in Brussels his nation doesn’t feel pressure to ask for a bailout and German Chancellor Angela Merkel questioned whether creating a euro-area bank supervisor by the end of 2012 was realistic. The benchmark note yield dropped for the first time in five days as a U.S. industry report showed purchases of existing houses fell. Stocks slid the most since June.

“It’s the unwinding from the pressure we saw in the market all week,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that deal with the Federal Reserve. “Some of the headlines out of the European Union summit don’t seem so encouraging. In general, whatever their fixes are seem to be pushed out even further till next year.”

The 10-year yield declined seven basis points, or 0.07 percentage point, to 1.76 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It earlier dropped eight basis points, the most since Sept. 7. The 1.625 percent note maturing in August 2022 climbed 5/8, or $6.25 per $1,000 face amount, to 98 3/4.

The yield gained 11 basis points on the week. It rose to 1.83 percent yesterday, the highest level in a month. The rate climbed through its 200-day moving average on Oct. 17.

Stocks Fall

Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 30-year bond futures in the week ending Oct. 16, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 3,219 contracts on the Chicago Board of Trade. Last week, traders were net-short 828 contracts.

The Standard & Poor’s 500 Index fell 1.7 percent today, in its worst drop on a closing basis since June 25.

“Some of the risk-on trade we’ve had has been dissipating,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “There isn’t any selling pressure coming in.”

Treasuries rebounded from the least expensive in almost two months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.81 percent today, after closing at negative 0.76 percent yesterday, the least costly level since Aug. 21. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.

‘Range Trade’

A measure of stress in U.S. credit markets, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, rebounded from a record low level on an intraday basis reached earlier this week.

The U.S. two-year interest-rate swap spread, the difference between the two-year swap rate and the comparable-maturity Treasury yield, widened to 10.5 basis points today after narrowing to eight basis points on Oct. 17 in New York, according to data compiled by Bloomberg. That was the least on an intraday basis since Bloomberg started keeping data in November 1988. It is down from a 2012 high of 49.3 basis points on Jan. 3.

Home Sales

Sales of previously owned U.S. homes, tabulated when a contract closes, decreased in September 1.7 percent to a 4.75 million annual rate, matching the median forecast of economists surveyed by Bloomberg, figures from the National Association of Realtors showed today in Washington. The median prices from a year earlier jumped by the most since 2005 as inventories dwindled.

The Fed sold $1.09 billion of Treasury Inflation Protected Securities today due from April 2014 to January 2016. The central bank is swapping short-term Treasuries in its holdings for longer-term securities to put downward pressure on borrowing costs, part of its efforts to spur the economy.

Bidders in a $7 billion sale of 30-year inflation-indexed securities yesterday accepted a record-low yield of 0.479 percent for securities that guard against the threat of rising consumer prices.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.50 percentage points. The average over the past decade is 2.17 percentage points.

‘Political Will’

In Brussels, Merkel said it’s an open question whether European policy makers can meet the deadline they’d set hours earlier to establish a euro-area bank supervisor by year-end.

“There are complicated questions to clarify and we’ll see in December if we complete it or not,” Merkel told reporters after a two-day European Union summit wrapped up today. “For now, the political will is there.”

The European Central Bank is set become the currency zone’s main financial supervisor by Jan. 1, raising the prospect of direct aid to Spain’s banks during 2013, the 27 EU leaders agreed at the gathering. The system will phase in and could cover all 6,000 euro-area banks by Jan. 1, 2014.

Spain already has secured a 100 billion-euro ($130 billion) financial-sector lifeline and has so far not sought to asked for aid that would unlock ECB bond-buying.

“It’s a long road of uncertainty and it’s been going on for so long,” Comiskey of Bank of Nova Scotia said. “There’s no change in terms of the big picture.”

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