Treasury 10-year yields approached the highest in more than two weeks after speeches by President Barack Obama and House Speaker John Boehner showed they still disagree on how to raise the borrowing limit. Thirty-year yields were little changed while traders in inflation-protected securities increased bets that costs will rise, driven by speculation the U.S. will have its credit rating downgraded, weakening the dollar. Debt-market rates indicate increasing demand for higher-yielding assets over Treasuries, just as the government prepares to sell $35 billion of two-year notes in the first of three auctions this week. “The reason Treasury yields are moving higher at the moment is because of the political issues in Washington around the debt ceiling,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “The U.S. looks to be heading for a downgrade. The risk of a possible short-term or temporary default is really worrying markets.” Ten-year yields were little changed at 3.0 percent as of 10:30 a.m. in London, according to Bloomberg Bond Trader prices. They earlier reached 3.04 percent, the most since July 11. That’s still below the decade average of 4.05 percent. The 3.125 percent note maturing in May 2021 traded at 100 1/32. Obama warned in a televised speech yesterday in Washington of a “deep economic crisis” unless Republicans and Democrats can agree on how to raise the $14.3 trillion federal borrowing limit while at the same time reigning in future spending. Boehner, an Ohio Republican, who spoke afterwards from the U.S. Capitol, said Obama was asking for a “blank check.” Gross’s View Earlier in the day, Boehner and the Democratic leader in the Senate, Harry Reid of Nevada, unveiled competing plans to raise the so-called debt ceiling. Reid dropped Democrats’ insistence on tax increases, a move favored by Obama, in the plan he offered yesterday. Treasuries with the longest maturities will have the biggest declines if the U.S. loses its top-level debt rating, Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., said in a Twitter posting. “Investors wonder what it will be in 2041!” wrote Gross, co-chief investment officer at Pimco, which is based in Newport Beach, California. Yields on 30-year debt added one basis point to 4.33 percent after climbing six basis points yesterday. Five-year yields increased two basis points to 1.55 percent while two-year yields were little changed at 0.40 percent. Alternative Havens “We might have to get used to the fact that safe-haven assets aren’t that safe anymore,” said Rabobank’s Marey. “U.S. Treasuries have always been the main investment grade safe-haven assets, but investors are starting to look at alternatives.” Purchases of new U.S. homes probably stagnated in June, indicating housing is still languishing two years into the economic recovery, economists said before a report today. Sales grew 320,000 last month from a year ago, little changed from the 319,000 annual rate of the previous month, economists surveyed by Bloomberg forecast before a Commerce Department report. Home prices declined in May from a year earlier while consumer confidence fell to a nine-month low in July, other data may show. ‘No Improvement’ Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default on Aug. 2 unless the borrowing limit is increased. The impasse has increased the probability Standard & Poor’s will cut the U.S. credit rating from AAA within three months to 50 percent, the company reiterated on July 21. “There’s no improvement” in the outlook for the debt ceiling, said Yusuke Tanaka, a senior dealer in Singapore at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest bank. He spoke in a telephone interview. Reid and Boehner’s proposals take as their starting points $1.2 trillion in discretionary spending cuts over 10 years with both officials agreeing to establish bipartisan committees to recommend future savings, with a guaranteed vote in Congress. The two sides are divided on a Republican demand for a second debt limit vote tied to another $1.8 trillion in budget cuts that likely would come early next year, just as 2012 election campaigns are gearing up. Democrats want to extend the debt ceiling until 2013 and make $2.7 trillion in total spending cuts, which includes $1 trillion from winding down the Iraq and Afghanistan wars, savings Republicans criticized as a gimmick. Dollar Weakens The U.S. currency fell to a record low against the Swiss franc, and approached its postwar low versus the yen. Spot gold climbed to a record high $1,624.07 an ounce yesterday. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to a more than two-month high of 2.49 percentage points. The Fed is scheduled to buy $2.75 billion to $3.5 billion of Treasuries due from August 2018 to May 2021 today, according to its website. The central bank is investing the principal payments from its debt holdings in Treasuries as part of its efforts to spur the economy. The two-year notes being sold today yielded 0.42 percent in pre-auction trading, compared with 0.395 percent at the prior sale on June 27. Investors bid for 3.08 times the amount of debt available last month, less than the average of 3.39 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, bought 22 percent of the notes, the least since February 2008. The Treasury is also scheduled to sell $35 billion of five- year debt tomorrow and $29 billion of seven-year securities on July 28. The TED spread, the difference between what banks and the U.S. government pay to borrow for three months, narrowed to 20 basis points, the least in five weeks. To contact the reporters on this story: Garth Theunissen in London gtheunissen@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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