Treasuries Rise as Call for Greece Referendum Buoys Safety Bid – Businessweek

Treasuries Rise as Call for Greece Referendum Buoys Safety Bid – Businessweek.

By Cordell Eddings

Nov. 1 (Bloomberg) — Treasuries rose, extending the biggest rally in 30-year bonds since March 2009, as renewed concern Greece will default and the European rescue plan will unravel boosted demand for the safest assets.

U.S. government debt securities gained for a third day after Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote, risking pushing the country into default if rejected by voters. Treasuries were supported along with German bunds and U.K. gilts as stocks fell around the world on signs global growth is slowing. Federal Reserve policy makers begin a two-day meeting today.

 

“It’s a risk-aversion day, brought upon by the ongoing European debt crisis and the Greek referendum, which suggests that the Greece situating may not be as well contained as originally thought,” said Christopher Sullivan, who oversees $1.7 billion as chief investment officer at United Nations Federal Credit Union in New York. “A disorderly Greek default would wreak havoc on the world’s financial markets.”

 

Yields on 30-year bonds dropped 15 basis points, or 0.15 percentage point, to 2.98 percent at 12:19 p.m. New York time, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 gained 3 5/32, or $31.56 per $1,000 face amount, to 115 3/32. The yield slid 25 basis points yesterday, the most on a closing basis since March 2009.

 

Note Yields

 

The 10-year note yields fell 14 basis points to 1.98 percent, and touched the lowest since Oct. 6. Ten-year gilt yields fell 24 basis points to 2.19 percent. German 10-year yields fell 27 basis points to 1.75 percent.

 

U.S. two-year note yields dropped one basis point to 0.23 percent, the lowest since Sept. 26. The yield curve, or the difference between two- and 30-year Treasuries, narrowed for a third straight day to 275 basis points, the narrowest since Oct. 10.

 

The Standard & Poor’s 500 Index slid 2.8 percent. The euro weakened 1.3 percent to $1.3678.

 

Papandreou’s call for a referendum and a parliamentary confidence vote raised the prospect of derailing the European bailout effort and pushing Greece into default. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative.

 

“The referendum announcement is clearly unnerving the markets to the benefit of Treasuries,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The euphoria over a possible European solution was clearly overdone given the questions that were in the market even before this announcement. There hasn’t been a solution, and the potential for contagion still looms.”

 

The two-year swap spread widened to 35 basis points, more than the 25 basis point average for the spread this year. In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed rate and the yield on similar-maturity Treasuries.

 

“Psychologically, the swap spread brings the credit issues of the whole Euro crisis to the forefront,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, which as one of the 21 primary dealers that trade with the Fed. “Banks or paying more to lend to each other because it’s still very uncertain how this will end up, and funding concerns are real.”

 

A failure by a Congressional supercommittee to reach agreement on deficit reduction wouldn’t, on its own, cause the U.S. to lose its top credit ranking, Moody’s Investors Service said.

 

While the failure “would be more negative,” the lack of an agreement isn’t decisive in the U.S.’s Aaa rating because the government’s August agreement to reduce the deficit includes $1.2 trillion in automatic cuts to discretionary spending that would begin in October 2012, Moody’s said today in a statement.

 

–Editors: Paul Cox, Greg Storey

 

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

 

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net