Treasuries Drop as Stocks Gain on Outlook for U.S. Debt Pact

Sunday, 31 Jul 2011 09:52 PM

Treasuries fell the most in a week as Congressional leaders approved a plan to raise the debt ceiling, sending stocks higher.

Benchmark 10-year notes slid for the first time in three days as President Barack Obama announced the pact late yesterday in Washington, confirming reports from lawmakers that an agreement was near. The failure of earlier negotiations to increase the cap had led to concern the U.S. would default on its debt as soon as this week, hurting the economy.

“The debt-ceiling problem will be solved,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “The equity markets welcomed the news. The U.S. economy can grow. Stocks will go up and bonds will lag.”

The 10-year yield climbed four basis points to 2.83 percent as of 9:52 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.125 percent note due in May 2021 slid 9/32, or $2.81 per $1,000 face amount, to 102 15/32.

The MSCI Asia Pacific Index of shares advanced 0.8 percent, snapping a three-day decline.

Japan’s 10-year yield was unchanged at 1.08 percent, within two basis points of this year’s low.

Investors Undeterred

Investors from China to the U.K. are still lending money to the U.S. for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

The 10-year yields slid to 2.77 percent on July 29, the least since November, according to data compiled by Bloomberg.

Treasury yields average 0.72 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January. The dollar saw higher than average net inflows last week compared with the previous year, according to Bank of New York Mellon, which is the custodian for more than $20 trillion.

“There is no other country that can step in and replace the U.S. at the core of the system,” Mohamed El-Erian, the chief executive officer at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s largest bond fund, said July 25 in an interview on Bloomberg Television. “The U.S. is the supplier of the reserve currency.”

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