By Wes Goodman
Nov. 30 (Bloomberg) -- Treasuries rose for a third day on speculation a funding crisis in Ireland will spread to Portugal and Spain, increasing demand for the relative safety of U.S. government debt.
U.S. securities also gained as the Federal Reserve prepared to buy $6 billion to $8 billion of notes due from 2014 to 2016 today, after scooping up $9.4 billion of debt yesterday as part of its plan to boost growth. Treasuries still headed for their biggest monthly loss since March after the U.S. economy showed signs of improving.
?The Europe situation is supporting the bond market,? said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. ?The Fed is also helping the market. We look for yields to start falling again.?
Benchmark 10-year yields declined two basis points to 2.81 percent as of 7:23 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 advanced 6/32, or $1.88 per $1,000 face amount, to 98 13/32.
Yields will drop to 2.4 percent by March 31, according to BNP, which is one of the 18 primary dealers that trade directly with the Fed.
Treasuries also gained on speculation money managers will add to their holdings to match changes in benchmark bond indexes at the end of the month, analysts Ajay Rajadhyaksha and Dean Maki at Barclays Capital Inc. in New York wrote in a report yesterday. The company is another primary dealer.
The indexes will incorporate the two-, five- and seven-year notes the government sold this month.
U.S. government securities handed investors a 0.8 percent loss this month as of yesterday, Bank of America Merrill Lynch indexes show, as the economy improved. German bonds fell 0.9 percent, while Ireland?s government securities plunged 11 percent. Investors in Japan?s sovereign debt market, the biggest in the world, lost 1.1 percent, the indexes show.
Avoid Treasuries
Investors should stay away from Treasuries even as the Fed buys them under its program known as quantitative easing, said Roger Bridges at Tyndall Investment Management Ltd. in Sydney.
?I?d avoid them like the plague if you can,? said Bridges, who oversees the equivalent of $11.5 billion as head of debt at the unit of Australia?s largest insurer. ?The economy?s doing quite well. It makes you ask, was the QE needed??
Treasuries will gain for the rest of 2010 and decline in 2011, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The 10-year yield will be 2.62 percent on Dec. 31 and 3.23 percent at the end of next year, the survey shows.
Improved Consumer Confidence
Industry reports today will show consumer confidence rose while gains in real-estate prices slowed, Bloomberg News surveys of economists show.
The Labor Department may say on Dec. 3 that American employers added jobs for a second month in November while the jobless rate held at 9.6 percent, according to the surveys.
?Elevated? unemployment and ?subdued? inflation helped spur the Fed to arrange its $600 billion stimulus program, the central bank said in a Nov. 3 statement.
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 securities, widened to 2.14 percentage points from this year?s low of 1.47 percentage points in August. The five-year average is 2.09 percentage points.
Treasuries advanced on speculation an 85 billion euro ($111.6 billion) rescue for Ireland will fail to contain Europe?s sovereign-debt crisis. Ireland on Nov. 28 became the second country to tap European assistance, following Greece.
Record Cost
The cost of insuring against default on Portuguese and Spanish government debt soared to record levels.
Credit-default swaps on Portugal jumped 36 basis points to 538 yesterday, according to data provider CMA. Contracts on Spain climbed 28 basis points to 351.
The swaps protect debt against default, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. The contracts pay the buyer face value in exchange for the securities if a borrower fails to meet its debt agreements.
Corporate bond sales worldwide are tumbling. Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, according to data compiled by Bloomberg.
It may take years to bring down Europe?s debt levels, said Anthony Crescenzi, a strategist at Pacific Investment Management Co., which runs the world?s biggest bond fund.
The Ireland bailout doesn?t solve the problem of reducing the nation?s debt, said Crescenzi, who is based the company?s main office in Newport Beach, California.
?The average interest rate is said to be about 5.8 percent,? he said in an interview on Bloomberg Television?s ?InBusiness With Margaret Brennan? yesterday. ?Can we expect Ireland?s economy to grow 5.8 percent in years ahead? Probably not. The debt will grow faster.?
--With assistance from Tim Catts in New York. Editors: Jonathan Annells, Rocky Swift.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
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