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Treasuries Snap Gain as Greek Deal Cuts Demand for Safety

Treasury 10-year yields approached the highest level in almost three weeks after euro-area finance ministers agreed on an aid plan for Greece, damping demand for the relative safety of U.S. debt.

Benchmark notes snapped a gain from yesterday amid signs the U.S. Congress will reach a budget deal that averts the so-called fiscal cliff of spending cuts and tax increases. The Treasury is scheduled to sell $35 billion of two-year securities today, the first of three auctions this week for $99 billion. Orders for durable goods declined in October, economists forecast before a report today.

“The markets are reacting to the progress made on Greece, which will put that risk off the table for now,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Until we have some breakthrough news on the fiscal cliff, I don’t see many reasons for Treasuries to move a lot lower.”

The 10-year yield rose one basis point, or 0.01 percentage point, to 1.67 percent at 9:18 a.m. in London, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 fell 2/32, or 63 cents per $1,000 face amount to 99 19/32. The yield climbed to 1.70 percent on Nov. 23, the highest level since Nov. 7.

In the latest bid to keep the 17-nation euro intact, the ministers lowered the rates on Greece’s bailout loans, suspended interest payments for a decade, gave the nation more time to repay and engineered a bond buyback. The country was also cleared to receive a 34.4 billion-euro ($44.6 billion) loan installment in December.

‘Bad News’

“Some of the uncertainty in the European debt crisis may be resolved,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc. “It’s good news for equities and bad news for the bond market.”

The approach of the fiscal cliff is making some fund managers reluctant to sell Treasuries, said Kei Katayama, who helps oversee the equivalent of $60.6 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo.

President Barack Obama is working with lawmakers to try to ease the measures to keep gross domestic product growing. Ten-year yields have been in a range of 35 basis points since the middle of August.

“Nobody’s willing to push yields higher,” Katayama said. “Everyone believes there will be some kind of compromise but nobody can say exactly what the influence will be on GDP. That’s the reason Treasury yields are staying in a very narrow range.”

‘Bearish Momentum’

Bookings for U.S. goods meant to last at least three years dropped 0.7 percent last month, according to the median forecast of 75 economists surveyed by Bloomberg News. That compares with a 9.8 percent increase in September. Other data today will show property values and consumer confidence increased, according to separate Bloomberg surveys.

Federal Reserve Bank of Dallas President Richard Fisher said he advocates limits on U.S. quantitative easing.

The Fed could “pursue a different course” and announce “a limit as to how much we are going to acquire of treasuries and mortgage-backed securities, say up to a limit of X, up to a point where our balance sheet reaches that,” Fisher said in a speech today in Berlin.

The two-year notes scheduled for sale today yielded 0.28 percent in pre-auction trading. Because of their shorter maturity, the securities are more sensitive than longer-term bonds to the Fed’s target for overnight bank lending, which policy makers have pledged to keep near zero at least through the middle of 2015.

The previous two-year sale on Oct. 23 drew record purchases from the group of investors that includes pension funds and insurance companies. So-called direct bidders, or institutional investors outside of the primary dealers, bought 38.2 percent of the notes.

The Fed plans to buy as much as $2 billion of Treasuries maturing from February 2023 to February 2031 today, according to the Fed Bank of New York’s website.

The purchases are part of the central bank’s effort to put downward pressure on long-term borrowing costs by selling shorter-term Treasuries and buying those due in six to 30 years.

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