BS: U.S. 30-Year Bonds Fall Amid European Bailout Wagers
Treasury 30-year bonds fell amid speculation European policy makers will unveil a financial bailout program for Spain as early as next week.
Benchmark 10-year note yields rose from the lowest in a week after the Financial Times reported Spain and the European authorities are discussing a plan to present Sept. 27, citing officials in the talks. A senior Italian government official said Italy and Spain won’t seek bailouts unless a new surge in bond yields shuts them out of markets. The Federal Reserve will buy as much as $2 billion in Treasuries today.
“We had arguably optimistic news overnight that suggested that the European peripherals don’t need a bailout at this time,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “As a result, longer-end Treasury yields have edged higher.”
Yields on 30-year bonds increased three basis points, or 0.03 percentage point, to 2.98 percent at 9:07 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent security due in August 2042 dropped 21/32, or $6.56 per $1,000 face amount, to 95 1/2.
The 10-year yield note yield rose two basis point to 1.79 percent. It touched 1.72 percent yesterday, the lowest level since Sept. 13
Swap Rates
The gap between 10-year interest-rate swap rates and similar-maturity Treasury rates was 0.75 basis points, after narrowing to minus 0.06 basis points yesterday, the first time since September 2010 that yields on the swaps fell below those on Treasuries. A negative reading indicates increased demand for investments outside the Treasury market.
Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets. The spread is usually positive because investors demand more yield to compensate for the risk of a swap, a transaction between banks, than they do to lend to the U.S. government.
Italian and Spanish 10-year bond yields have dropped more than 1 percentage point since European Central Bank President Mario Draghi first signaled on Aug. 2 that the bank would buy debt of distressed euro-region nations in tandem with the European Union’s bailout funds.
While Italian Prime Minister Mario Monti championed the EU bond-buying plan, Draghi’s insistence on imposing conditions on any aid has left Monti and Spanish Prime Minister Mariano Rajoy reluctant to make seek a bailout, a requirement.
‘National Sovereignty’
“There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say, ‘I give up my national sovereignty,’” Gianfranco Polillo, undersecretary of finance, said in an Bloomberg interview in Rome late yesterday. “I rule it out for Italy and for any other country.”
The plan for Spain will focus on structural measures long sought by the EU, not new taxes or spending cuts, though the European Commission may still request more austerity measures to meet existing budget targets, the Financial Times said.
“The market will be looking at headline risk out of Europe,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed.
Yields Retreat
Treasuries gained earlier this week on speculation Fed efforts to spur growth in gross domestic product will take time. Ten-year yields have dropped eight basis points this week.
The Fed said Sept. 13 it would buy $40 billion of mortgage- backed bonds a month to put downward pressure on borrowing costs. It pledged to keep its target for overnight loans between banks close to zero until at least the middle of 2015.
The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years to hold down borrowing costs. It will buy debt today maturing from November 2022 to February 2031 as part of the program, according to Fed Bank of New York’s website.
The Treasury plans to auction $35 billion of two-year notes Sept. 25, the same amount of five-year debt the next day and $29 billion of seven-year securities Sept. 27.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
