Treasuries declined, pushing up yields on 10-year notes the most in more than a week, as Germany signaled it may be open to a bailout of Spain, reducing the haven appeal of U.S. government debt.

Yields extended gains after a report showed the cost of living in the U.S. climbed for a second month in September. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened to 2.47 percentage points, above the average of 2.17 percentage points since October 2002.

“Folks are a little bit more excited about the prospects for recovery in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Yields are having something of a yield rally.”

The benchmark 10-year yield climbed six basis points, or 0.06 percentage point, to 1.72 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield gained the most since Oct. 5 and has climbed from a record low 1.38 percent on July 25. The 1.625 percent security due in August 2022 fell 1/2, or $5 face value, to 99 5/32.

The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.86 percent, the least expensive since Sept. 20. A negative reading indicates investors are willing to accept yields below what's considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.

Market Stress

A measure of stress in U.S. credit markets, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, reached the lowest level in 19 years.

The U.S. two-year interest-rate swap spread narrowed to as low as 8.75 basis points in New York, according to data compiled by Bloomberg, the least on an intra-day basis since Sept. 27, 1993.

Treasury yields moved higher amid a report Germany is open to Spain seeking a precautionary credit line from Europe's rescue fund, two senior coalition lawmakers said, signaling a reversal of Finance Minister Wolfgang Schaeuble's public position.

The comments by Michael Meister, a deputy caucus leader of Chancellor Angela Merkel's Christian Democratic bloc, and Norbert Barthle, her party's budget spokesman, indicate a rolling back of German resistance to a full sovereign bailout for Spain. Schaeuble cautioned Spain against seeking aid on top of its bank bailout as recently as last month.

Treasury Bulls

“It shows that Germany is more open to reaching into their own pockets to help out the peripheral countries in Europe,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We have to see what the details are – - it's difficult for Europe to come out of this crisis without Germany using some of their own money to correct it.”

Amid the positive news in Europe, investors in Treasuries remained bullish in the week ending yesterday, betting prices of the securities will rise as they cut short positions, according to a survey by JPMorgan Chase & Co.

The proportion of net longs was 16 percentage points, up from six percentage points from the previous week, according to the survey. The percentage of outright longs rose to 25 percent, from 21 percent, while outright shorts dropped to 9 percent from 15 percent. Neutrals rose to 66 percent from 64 percent.

Economic Indicators

The Fed purchased $4.743 billion of Treasuries due from November 2020 to August 2022 today as part of its Operation Twist program to lower borrowing costs and boosts the economy, according to the Fed Bank of New York's website.

The consumer-price index increased 0.6 percent for a second month, the Labor Department reported today in Washington. Economists surveyed by Bloomberg had forecast a 0.5 percent advance. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.1 percent, less than projected.

Another report showed output at factories, mines and utilities rose 0.4 percent after a 1.4 percent decline in August that was the biggest since March 2009, the Fed said in Washington. The median estimate in a Bloomberg survey of 85 economists called for production to rise 0.2 percent. Manufacturing, which makes up 75 percent of the total, climbed 0.2 percent.

Volatility, Volume

“I don't think you can get excited about the manufacturing sector,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade Treasuries with the Fed. “We are still coming off low levels from August.”

Volatility remains below historic levels amid continued Fed purchases. Volatility reached 64.8 basis points at 4:41 p.m. in New York, below this year's average of 72.5 basis points. Bank of America Merrill Lynch's MOVE index, which measures price swings based on options, touched 57.5 basis points on Sept. 19, the least since May 7. The average over the past decade is 102.1 basis points.

Treasury volume reported by ICAP Plc, the largest inter- dealer broker of U.S. government debt, rose to $256 billion, from $178 billion yesterday. It has averaged $242 billion in 2012. It touched a high this year of $464 billion in September.

The U.S. will sell $7 billion in 30-year Treasury Inflation Protected Securities on Oct. 18. At the previous auction of the debt on June 21, the U.S. sold $7 billion of the securities at a record low yield of 0.520 percent.

Instant Insights /

Treasury Yields Increase Most in Week on Spain Bailout Optimism

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