24 Jul 2011

Treasuries Decline as Deficit Talks Collapse to Raise Debt Ceiling

July 23 (Bloomberg) -- Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee, talks with Bloomberg's Al Hunt about negotiations between lawmakers over raising the U.S. debt limit, changes to the tax code as a means of spurring economic growth, and the viability of proposals designed to reduce government spending. Bloomberg's Julie Davis and Hans Nichols discuss the breakdown of the debt-limit talks. Poppy Trowbridge reports on the phone hacking scandal surrounding Rupert and James Murdoch and the potential long-term consequences for News Corp. News Commentators Margaret Carlson and Kate O'Beirne talk about Rupert Murdoch's potential culpability and the future of News Corp. (Source: Bloomberg)
Treasuries fell for the first time in three weeks as talks collapsed between President Barack Obama and House Speaker John Boehner over a deficit-cutting package as part of an agreement that would lift the nation’s debt ceiling.
Two-year note yields touched the highest in almost two weeks July 21 as Standard & Poor’s reiterated it saw a 50 percent chance of cutting the U.S. credit rating within three months and European leaders reached a deal to stem Greece’s debt crisis. Boehner said yesterday after markets closed he will instead talk with Senate leaders on a way to avoid a U.S. default. The U.S. will sell $99 billion in notes next week.
“It’s certainly a negative thing for Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The deep divisions between the parties make an agreement much tougher, but we still have the potential for 11th-hour emergency measures.”
Yields on benchmark 10-year notes rose six basis points, or 0.06 percentage point, to 2.96 percent yesterday in New York, from 2.91 percent on July 15, according to Bloomberg Bond Trader prices. The price of the 3.125 percent securities due in May 2021 fell 15/32, or $4.69 per $1,000 face amount, to 101 3/8.
Thirty-year bond yields increased one basis point to 4.26 percent. Two-year note yields were up three basis points to 0.39 percent and reached 0.41 percent on July 21, the highest level since July 8.
Treasuries pared weekly losses yesterday before Boehner’s announcement amid bets Obama and lawmakers would reach a deal to reduce the deficit, raise the debt limit and avert a default.

White House Meeting

Obama said late yesterday he summoned congressional leaders of both parties to the White House today. He and Boehner have confronted strife within their ranks and dwindling time to avert a default as they pressed for a plan to boost the nation’s $14.3 trillion debt limit. The two leaders had discussed cutting spending by trillions of dollars and overhauling the tax code.
The Treasury has said the government, which reached the borrowing ceiling on May 16, will run out of options to prevent a default Aug. 2.
“I’m reluctant to conclude that this is the end of the story,” David Beers, S&P’s global head of sovereign and international public finance, said yesterday in a telephone interview fromWashington. “There was always the possibility that it might not be possible for the parties to find some common ground, but let’s wait and see what the weekend brings.”

‘Credible Solution’

S&P said earlier in a report that even if Congress raises the limit in time to avert a default, it might lower the U.S. AAA sovereign rating to AA+ with a negative outlook if a deal isn’t accompanied by a “credible solution” on the debt burden.
Demand for the safety of government securities also ebbed this week as a July 21 summit of European leaders loomed. After eight hours of talks in Brussels, they announced 159 billion euros ($229 billion) in new aid for Greece.
The leaders empowered their 440-billion euro rescue fund to buy debt across stressed nations, helping to erect a firewall around Spain and Italy even as they risked temporary default to lighten the Greek debt burden. Bondholders will share a portion of the bill.
“The market was beginning to price in some fears of default in Europe, and so it was oversold,” Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies & Co., said yesterday. The firm is one of 20 primary dealers that trade with the Federal Reserve. “We are backing away from the absolute crisis of the euro zone.”

Refuge Demand

U.S. government debt returned 3 percent in the past three months as Europe’s debt crisis spurred demand for the safest securities, based on Bank of America Merrill Lynch data. The Standard & Poor’s 500 Index gained 1.1 percent.
Obama said late yesterday at the White House that “at minimum” Congress must act to avoid a U.S. default that would roil markets and damage the economy.
U.S. 30-year bond yields had the biggest intraday drop since December 2010 on July 19, 13 basis points, after Obama endorsed a $3.7 trillion deficit-cutting proposal by a bipartisan group of senators to end the stalemate.
The plan, whose authors are known as the Gang of Six, faced resistance from House Republicans, who have continued to stress opposition to a debt compromise that includes more taxes.
“They don’t want any tax increases,” Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank’s TD Securities unit in New York, said. “This is not going to fly.”

Note Auctions

Starting a week before the debt-limit deadline, the U.S. will sell $35 billion of two-year securities, the same amount of five-year notes and $29 billion of seven-year debt. The daily auctions begin July 26. The sizes are the same as at the past nine offerings of the three securities.
The 10-year yield will rise to 3.53 percent by year-end, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings. The median projection in June was for 3.65 percent.
Economists have cut their forecasts for Treasury yields as U.S. gross domestic product growth has slowed.
The pace of expansion slipped to 1.8 percent in the second quarter, according to a Bloomberg News survey of economists before the Commerce Department reports the data on July 29. Growth slowed from 3.1 percent in the final three months of 2010 to 1.9 percent in the first quarter of 2011.

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