Treasury prices swing on Europe debt crisis delays

AP News
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Posted: Oct 20, 2011 3:54 PM
Treasury prices swing on Europe debt crisis delays

Treasury prices fell Thursday after swinging all day on news about France and Germany's progress toward solving the Greek debt crisis.

Talks over a plan to shore up European banks and prevent a messy default by Greece broke down, leading French and German leaders to call a second emergency summit for next week. They already plan to meet this weekend. Traders had hoped the Sunday meeting would produce a clearer plan and sooth volatile markets.

The price of the 10-year Treasury note fell 19 cents for every $100 invested, pushing its yield up to 2.18 percent at 3:20 p.m. Eastern time from 2.16 percent late Wednesday.

Greece is running out of money and appears likely to default on its debt. French and German banks lent Greece billions. Their governments and international lenders are working on a plan that would forgive some of Greece's debt and try to prevent the crisis from spreading to other countries.

The ups and downs of talks in Europe have caused extremely volatile trading in recent weeks.

Treasurys rose Thursday morning after reports that European leaders might postpone a decision on Greece's next bailout until next month. French President Nicolas Sarkozy and German Chancellor Angela Merkel had promised a plan sometime this month.

The rising price pushed the yield on the 10-year Treasury note down to 2.12 from 2.20 percent. Stocks sank.

Treasury yields fall when demand for them increases and their prices rise. The lower yield signals that traders are willing to accept an even smaller return on an investment seen as safe.

Treasury prices fell in the afternoon after Merkel and Sarkozy announced the second summit. The news drew cash into riskier investments, such as stocks. U.S. share indexes turned positive for most of the afternoon.

The turn away from low-risk investments sent the 10-year yield up to 2.19 percent from 2.12 percent. It fell back later in the day.

Not every market turned optimistic after the second European summit was announced. The Greek debt crisis continued to threaten its European neighbors by making them appear less creditworthy and driving their borrowing costs higher.

Traders of debt issued by Germany, Spain, France and Italy all demanded higher yields in exchange for holding investments backed by those governments. As the costs of a Europe-wide bailout come into focus, traders see a default by any of those countries as more likely, said Peter Tchir, who runs the hedge fund TF Market Advisors.

"Right now, nothing in that market is getting better," Tchir said. Whatever optimism about Europe had lifted stocks, he said "the credit markets don't believe it."

Traders may see the likelihood of a German default increasing, but they are losing faith in Italy far more quickly. Italy's borrowing costs touched 6 percent for the first time since Aug. 5.

The difference between the Italian and German yields, a measure of their relative creditworthiness, spiked to a 15-year high of 3.97 percent, according to research from Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. LLC.

The last time the Italian yield exceeded the German yield by 4 percent was March 1996, as Italy's government struggled to qualify for membership in the euro currency union, Wilkinson said.

"They never bargained for a spillover from Greece like this," Wilkinson said in a research note about Italy. "With the French/German yield spread leading the way this week it looks like pressure will continue to build in to the weekend," he said.

The price of the 30-year Treasury bond fell 38 cents for every $100 invested, pushing its yield up to 3.20 percent from 3.17 percent late Wednesday.

The yield on the 2-year Treasury note edged down to 0.26 percent from 0.27 percent.

The yield on the three-month Treasury bill was unchanged at 0.02 percent. Its discount wasn't available.

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Reach Daniel Wagner at http://www.twitter.com/wagnerreports.