Treasury prices sink on hopes for Europe bank plan

AP News
Posted: Oct 26, 2011 4:26 PM
Treasury prices sink on hopes for Europe bank plan

Spreading optimism about Europe's ability to solve its debt crisis sent Treasurys lower Wednesday as traders sought out riskier investments.

The price of the 10-year Treasury note dropped 81 cents for every $100 invested, pushing the yield up to 2.21 percent from 2.14 percent late Tuesday.

Traders were monitoring talks between European leaders at propping up the region's banks, bailing out Greece and preventing the crisis from spreading to other countries.

European banks will be forced to increase their capital cushions to help them survive choppy financial markets, officials said. The money-raising would be the first step of a larger plan aimed at stabilizing Europe's financial markets and preventing a deep recession there.

However, leaders and banks remain at odds over the size of losses banks will take on Greek bonds they hold. Greece can't afford to repay its lenders. Writing down the value of Greek debt will cause massive losses for French and German banks.

Signals that a plan is taking shape sent U.S. stocks higher and Treasury prices lower. Stocks offer a bigger upside for investors when the economy is growing. Treasurys are more attractive when traders fear losses on other investments.

Treasury prices began to rise sharply in February as the U.S. economy weakened and Europe's debt crisis threatened to spread to the U.S. Strong demand pushed the 10-year yield to a record low of 1.71 percent on Sept. 22. The yield has risen since then as the economy improved and European leaders appeared closer to solving the debt crisis.

Also Wednesday, an auction of five-year Treasury notes drew strong interest, as the uncertain economic and financial outlook kept demand high for investments seen as safe.

The Treasury Department auctioned $35 billion in notes at a yield of 1.055 percent, slightly lower than the yield of five-year notes trading in the market. That means traders' bids were higher than market prices for similar investments.

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The ratio of bids to Treasurys sold was higher than the recent average, according to CRT Capital Group LLC. The higher ratio reflects rising demand.

The yield on the five-year Treasury note later rose to 1.07 percent from 0.99 percent late Tuesday.

The price of the 30-year Treasury bond fell $1.72 for every $100 invested, pushing its yield up to 3.21 percent from 3.15 percent.

The yield on the two-year Treasury note rose to 0.29 percent from 0.25 percent.

The yield on the three-month Treasury bill rose to 0.02 percent from 0.01 percent. Its discount wasn't available.