Treasuries advance the most in six weeks

Treasuries advanced the most since early November as optimism that a summit a week ago would spur a resolution of Europe’s debt crisis faded amid political discord, fueling investor demand for U.S. government bonds as a refuge.

The benchmark 10-year note yield touched a two-month low yesterday as Fitch Ratings reduced France’s outlook and put the grades of nations including Spain and Italy on review for a downgrade. Moody’s Investors Service said Dec. 12 it will review all EU countries’ ratings. Record demand at this week’s Treasuries offerings added to optimism investor interest will remain strong at next week’s $99 billion in note sales.

“The appetite for Treasuries remains the biggest on the planet,” said Paul Montaquila, head of fixed-income trading in San Ramon, California, at Bank of the West. “The uncertainty about what’s going on in Europe is superseding everything else. Treasuries continue to be the No. 1 asset to have.”

Ten-year yields slid 21 basis points, or 0.21 percentage point, to 1.85 percent yesterday in New York, from 2.06 percent on Dec. 9, according to Bloomberg Bond Trader prices. It was the biggest drop since the five days ended Nov. 4. The yields touched 1.83 percent, the least since Oct. 5, approaching the record 1.67 percent low reached Sept. 23. The price of the 2 percent securities due in November 2021 increased 1 29/32, or $19.06 per $1,000 face amount, to 101 3/8.

Thirty-year bond yields fell 26 basis points this week to 2.85 percent and five-year yields dropped nine basis points to 0.80 percent in their biggest decreases since Nov. 4.

The gap between yields on two- and 30-year securities narrowed for the first week since November, shrinking to 2.63 percentage points. The 2011 average is 3.5 percentage points.

The Treasury will sell next week $35 billion of two-year notes, the same amount of five-year debt and $29 billion of seven-year securities. The daily auctions begin Dec. 19. The amounts were unchanged from the last offerings of the maturities in November.

The government auctioned $12 billion in five-year Treasury Inflation Protected Securities Dec. 15 at a record low yield of negative 0.877 percent.

The offering capped the sale of $78 billion in notes, bonds and inflation-linked debt this week. The government auctioned $13 billion in 30-year bonds Dec. 14 at a record low yield of 2.925 percent, drawing 3.05 times more bids than the amount sold, the highest level since August 2000. Sales of 10- and three-year notes also drew stronger-than-average demand as investors sought refuge.