Treasuries Drop for 2nd Day as Greek Accord Damps Safety Demand

Bloomberg

By Lucy Meakin and Wes Goodman - Jul 21, 2011 11:02 AM GMT+0300

Treasuries fell for a second day as talks between German ChancellorAngela Merkel and French President Nicolas Sarkozy boosted optimism the European Union will help Greece avoid a default.

Longer-maturities led the decline after Merkel and Sarkozy reached a joint position on Greece before euro-region leaders meet today to discuss the region’s debt crisis. The U.S. will today auction $13 billion of 10-year inflation-protected securities and announce the sizes of three note sales scheduled for next week, after the administration indicated it may reach a compromise on the debt ceiling to avert a default.

“Given the news on the progress on the debt ceiling and the fact that we have a highly important EU meeting today, it’s been a minor movement thus far,” said Kornelius Purps, a fixed- income strategist at UniCredit SpA in Munich. “Depending on what comes out with respect to the U.S. debt issue and the European debt issue, the yield movements will be far larger than we are seeing currently.”

The benchmark 10-year yield rose two basis points to 2.95 percent as of 8:36 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent note due May 2021 dropped 6/32, or $1.88 per $1,000 face amount, to 101 15/32. The average over the past decade is 4.06 percent.

The yield will climb to 3.28 percent by the end of September, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.

Brussels Summit

Details of the Merkel, Sarkozy agreement will be released today when leaders meet in Brussels, the governments said in a statement after seven hours of talks in Berlin. Officials are under pressure to find a solution to stem the crisis. As Greece struggles to avoid a default, investors concerned at borrowing levels in Italy and Spain sent bond yields in those nations to euro-era records this week.

President Barack Obama’s administration signaled it may accept a short-term increase in the federal borrowing limit, adding to hopes the government is making progress.

Treasury Secretary Timothy F. Geithner has said the government will be unable to service the U.S. debt from Aug. 2. The administration indicated yesterday it would accept a short- term increase only if lawmakers need a few days to finish work on a broader agreement to cut the deficit.

“The latest bets coming out of the U.S. are positive on the ceiling,” said Rob da Silva, who helps oversee $235.3 billion as a fund manager at Principal Global Investors in Sydney. “Treasuries are reacting to that.” The company is part of Principal Financial Group Inc., a life insurer based in Des Moines, Iowa.

Auction Announcement

The U.S. will sell $35 billion of two-year securities on July 26, $35 billion of five-year notes the following day and $29 billion of seven-year debt on July 28, according to Wrightson ICAP LLC.

The amounts would be the same as the last time the U.S. auctioned these maturities in June, according to Wrightson, which is based in Jersey City, New Jersey, and specializes ingovernment finance.

An index of U.S. leading indicators rose at a slower pace in June, indicating the recovery will be restrained in the second half of the year, according to a Bloomberg News survey before the report today. Jobless claims and a measure of manufacturing increased, separate surveys showed.

Ten-year U.S. Treasury Inflation Protected Securities, or TIPS, yield 0.55 percent, compared with 0.887 percent at the previous auction of the securities on May 19.

Investors bid for 2.66 times the amount of debt offered two months ago, versus the average of 2.83 for the past 10 auctions. Indirect bidders, the investor class that includes foreign central banks, bought 40.7 percent of the securities, versus the 10-sale average of 43.2 percent.

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.30 percentage points, versus the 10-year average of 2.11 percentage points.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. Wes Goodman in Singapore at wgoodman@bloomberg.net;

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.