U.S., German Bonds Tumble as Europe Arranges Rescue Package
May 10 (Bloomberg) -- Treasuries tumbled the most in nine months and bunds slid after European governments announced a loan package worth almost $1 trillion and the European Central Bank said it will buy bonds to halt the region's debt crisis.
The decline sent German 10-year bund yields up by the most in at least a decade as Europe's efforts to keep Greece's fiscal woes from triggering a broader sovereign-debt collapse reduced demand for the relative safety of high-grade government securities. Stock markets rallied around the world and the cost of insuring against losses on European corporate bonds slid.
"Treasuries are down on the commitment that we've got from EMU nations to the euro," said David Keeble, head of fixed- income strategy at Credit Agricole Corporate and Investment Bank in London. "The euro-zone sovereign debt crisis has been holding Treasuries up, and it looks as though it might be solved."
The benchmark 10-year note yield rose 16 basis points to 3.59 percent as of 6:12 a.m. in New York, according to BGCantor Market Data. It advanced 18 basis points earlier, the biggest increase since Aug. 3, based on generic data compiled by Bloomberg. The 3.625 percent security due in February 2020 fell 1 10/32, or $13.13 per $1,000 face amount, to 100 10/32.
German 10-year yields advanced 17 basis points to 2.97 percent. They climbed as much as 21 basis points, generic data showed.
Australian 10-year rates climbed 10 basis points to 5.57 percent. In Japan, yields on same-maturity bonds rose 3 basis points to 1.30 percent.
Greek Crisis
Concern that European governments weren't moving fast enough to shore up the debt crisis in Greece helped propel the yield on the country's 10-year bond yield almost 10 percentage points beyond that of German bunds last week and sent stock markets tumbling. U.S. 10-year yields reached this year's low of 3.26 percent on May 6. The Dow Jones Industrial Average plunged almost 1,000 points that day, before trimming losses later in the session.
Greek bonds soared today, sending the 10-year yield 415 basis points lower to 8.52 percent.
The ECB said today it will buy government and private bonds as part of an historic bid to stave off the sovereign-debt crisis.
'Severe Tensions'
The ECB wants "to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy," the central bank said in a statement at 3:15 a.m. in Frankfurt.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 77 basis points to 510, according to Markit Group Ltd. prices at 7:17 a.m. in London. The index is a benchmark for the cost of protecting bonds against default and a decline signals improvement in perceptions of credit quality.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 21 basis points to 112, Markit prices show.
The euro climbed to $1.3038 from $1.2755 last week, when it slumped 4.1 percent, the biggest drop since the five days ended Oct. 24, 2008.
Futures on the Standard & Poor's 500 Index rallied 4.3 percent, snapping a four-day decline. The MSCI World Index of shares climbed 2.6 percent.
'Going Well'
U.K. government bonds fell today amid speculation Conservative leader David Cameron may forge a coalition government with the Liberal Democrats after last week's election produced no clear winner. The 10-year gilt yield climbed 8 basis points to 3.91 percent and the two-year yield rose 5 basis points to 1.14 percent.
William Hague, the former Conservative leader, said talks were "going well" as he entered a fourth round of negotiations with lawmakers from the third-biggest party. "Bear with us a little longer," said Nick Clegg, the Liberal Democrat leader.
One gauge of investor sentiment, the so-called payer skew, shows demand for Treasuries has been rising.
The cost to hedge against rising yields as measured by the payer skew in options on interest-rate swaps has fallen about 90 percent from a record high in October, Barclays Plc data show. At about four basis points, the measure, which the Treasury Borrowing Advisory Committee flagged as a warning sign in November, is back in line with the average before credit markets seized up in August 2007.
The skew measures the difference between volatility, which is a gauge of demand, on one-year options that allow investors to lock-in paying fixed rates on 10-year interest-rate swaps and those that grant the right to receive fixed rates.
Not Inflationary
The difference, which typically widens when traders anticipate a rise in yields, fell to 4.24 basis points last month, the lowest level since December 2008, and down from a record 37.6 basis points in 2009, according to Barclays data.
"The payer skew has fallen off a cliff in the last few months," said Piyush Goyal, a fixed-income strategist in New York at Barclays, one of the 18 primary dealers that are required to bid at the government debt sales. "The data has not been inflationary, and there is only so much demand from those who want to hedge higher rates."
Investors added to bets on inflation for the first time in a week. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.16 percentage points from 2.15 percentage points on May 7. The spread is still down from 2.45 percentage points on April 30.
Investors became more bearish on the outlook for U.S. government debt through the middle of the year, according to a weekly survey by Ried Thunberg ICAP Inc., a unit of ICAP Plc, the world's largest inter-dealer broker.
The company's sentiment index fell to 46 for the seven days ended May 7 from 47 the week before. A figure of less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 21 fund managers.
To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net Wes Goodman in Singapore at wgoodman@bloomberg.net .
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