Treasuries Fall as Bernanke's Comments Reduce Bid for Safety

Nov. 30 -- Treasuries fell and bill yields rose as Federal Reserve Chairman Ben S. Bernanke indicated the central bank will do whatever it takes to keep the economy out of a recession.

Yields on three-month bills increased the most in more than two weeks on reduced demand for the safety of short-term government securities. A plan Treasury Secretary Henry Paulson is negotiating with the biggest banks to limit foreclosures may reduce concern over subprime mortgage losses, which has led U.S. debt to the best monthly returns in 12 years.

``Bonds have already gone well beyond any expectation of an ease that makes sense because we have a huge liquidity and quality premium priced in,'' said Andrew Brenner, co-head of structured products in New York at MF Global Ltd. ``As some of that panic subsides, it's going to reverse what's out there.''

Ten-year note yields rose 8 basis points, or 0.08 percentage point, to 4.01 percent at 10:35 a.m. in New York, according to bond broker Cantor Fitzgerald LP. They are down from 4.47 percent on Oct. 31. The price of the 4 1/4 percent security due in November 2017 fell 5/8, or $6.25 per $1,000 face amount, to 101 30/32.

Rising gasoline prices, a housing slump and reduced access to credit will probably create ``headwinds for the consumer,'' Bernanke said in a speech yesterday in Charlotte, North Carolina. He also cited ``renewed turbulence'' in financial markets.

Bill Yields

Yields on three-month bills rose 19 basis points to 3.14 percent, the biggest increase since Nov. 13. Two-year note yields were up 9 basis points to 3.12. They have fallen 69 basis points this month, the biggest drop since September 2001, when they fell 75 basis points after terrorists attacked the U.S.

U.S. stocks rose on Bernanke's comments. The Standard & Poor's 500 Index advanced 0.5 percent, while Dow Jones Industrial Average increased 0.7 percent.

Bernanke's comments have ``bred a little bit of relief into equities,'' said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. ``That would take the shine off of bonds a bit. That inverse relationship has been a catalyst for the market's momentum.''

Treasury yields and equity prices have moved in the same direction about 80 percent of the time this month, reflecting a drop in bonds when stocks rise. Two-year note yields and the S&P 500 Index have had a correlation coefficient of 0.83, compared with 0.56 in October. Correlation coefficients measure the coincidence of gains or declines based on closing prices.

December Outlook

Fed fund futures on the Chicago Board of Trade show traders raised bets that the central bank will reduce borrowing costs to 4 percent at its next meeting Dec. 11. The odds of a half-point cut rose to 32 percent from 4 percent a week ago. Traders see a 68 percent chance of the Fed reducing rates to 4.25 percent.

Paulson, who will address a housing conference on Dec. 3, is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.

Merrill Lynch & Co., Citigroup Inc. and other securities firms reported more than $60 billion of losses and writedowns related to mortgages to borrowers with poor or incomplete credit histories.

Treasury Returns

An index of Treasury securities returned 3.2 percent in November, the most since May 1995, when they returned 4.07 percent, according to Merrill Lynch. Debt gained that month as U.S. employers shed jobs for the first time since 1993.

Consumer spending in the U.S. rose less than forecast in October and incomes increased at the slowest pace in six months, the Commerce Department said in Washington.

The 0.2 percent increase in purchases followed a 0.3 percent gain in September, the report showed. Incomes rose 0.2 percent, half the pace forecast by economists surveyed by Bloomberg News.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.2 percent in October for a second month. It was up 1.9 percent from October 2006, matching the September increase, which was revised higher.