Justin Lederer Comments: Treasuries Fluctuate As Monti Forms New Italian Government

November 16, 2011, Bloomberg Businessweek

Treasuries fluctuated as Mario Monti, Italy’s premier-in-waiting, wrapped up talks on forming a new government, easing concern Europe’s debt crisis was worsening.

Treasuries had advanced as investors in Europe shunned all but the safest assets amid rising borrowing costs at auctions and speculation the region’s financial woes are deepening as Italian bond yields rose above 7 percent, spurring demand for safety. U.S. debt pared gains earlier as investors focused on growth in retail sales and as stocks rose.

“Overall, Europe is going to be the main driver,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “It’s going to be the back and forth headlines for the foreseeable future.”

U.S. 10-year yields were little changed at 2.06 percent at 3:42 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 traded at 99 16/32. The yield fell earlier by as much as seven basis points.

Thirty-year yields fell one basis point to 3.09 percent. The Standard & Poor’s 500 Index rose 0.8 percent after falling as much as 0.6 percent.

Monti’s Cabinet

Monti said he is “convinced” Italy can overcome the current crisis as he prepares to meet with President Giorgio Napolitano tomorrow to present his new government.

Treasuries pared gains earlier after the retail sales report. A 0.5 percent retail sales gain followed a 1.1 percent increase for September, Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News was a rise of 0.3 percent. Purchases of electronics jumped by the most in two years.

Manufacturing in the New York region unexpectedly expanded in November, as measures of shipments and the employee workweek improved. The New York Fed Bank’s general economic index rose to 0.6, the first positive reading since May, from minus 8.5 in October.

Fed Bank of St. Louis President James Bullard said current policy is appropriate and central bankers should think twice before deciding on further large-scale purchases of securities.

‘Inflationary Risks’

“Outright asset purchases are a potent tool and must be employed carefully,” Bullard said in a speech today in St. Louis. “Increases in the size of the balance sheet entail additional inflationary risks if accommodation is not removed at an appropriate pace.”

A report tomorrow is forecast to show the consumer-price index was unchanged in October from a month earlier, according to the Bloomberg survey median ahead of Labor Department figures.

The cost of goods and services excluding food and energy in the U.S. is forecast to rise 2.1 percent in October from a year earlier, a separate survey showed.

Ten-year breakeven rates, the difference between yields on 10-year inflation-indexed bonds and nominal Treasuries of the same maturity, touched 2.024 percentage points today. The rate reached a 2011 high of 2.67 percent on April 11 and a 2011 low of 1.67 percent on Sept. 23. That breakeven rate represents traders’ expectations for the rate of inflation during the life of the bonds.