Treasuries Fall as Economic Rebound Lessens Appeal of U.S. Government Debt

Treasuries fell as signs that the global economic recovery is strengthening lessened the refuge demand for U.S. government securities from Europe’s sovereign- debt crisis.

The increase in yields helped generate higher-than-forecast demand at the Treasury’s $70 billion auction of notes and bonds. A report next week will show consumer prices fell in May indicating inflation has been kept in check, according to economists surveyed by Bloomberg.

“I don’t feel any rush to buy 10-year yields at 3.25 percent,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “Given the state of the data and the fact that we have the auctions behind us, it’s a bit disappointing. We should be doing better.”

The yield on the 10-year note rose this week three basis points, or 0.03 percentage point, to 3.23 percent after dropping nine basis points in the previous week, according to BGCantor Market Data. The 3.5 percent security maturing in May 2020 dropped 1/4, or $2.50 per $1,000 face amount, to 102 1/4.

The two-year note’s yield was little changed at 0.73 percent, while the yield on the 30-year bond increased one basis point to 4.14 percent.

Treasuries tumbled on June 10 the most in two weeks on evidence that the global economy may weather European debt turmoil. Bonds fell as Australia reported a third month of job gains, New Zealand raised interest rates and China said exports jumped 49 percent in May from a year earlier.

Drop in Retail

U.S. government debt erased most of that loss yesterday after the Commerce Department reported that U.S. retail sales unexpectedly fell last month. That followed a Labor Department report on June 4 showing U.S. employers added 105,000 fewer jobs last month than economists expected.

The Fed said in its Beige Book business survey that the U.S. economy, driven partly by consumer and business spending, strengthened in all 12 of the central bank’s regions in April and May, while noting growth in many districts was subdued.

“You don’t get the sense that the economy’s momentum is being built upon, at least according to what the Fed is looking at, once again tempering any concerns about inflation,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney.

Consumer prices fell in May for a second straight month, decreasing 0.2 percent, according to the median forecast of 60 economists in a Bloomberg News survey. The report from the Labor Department is due on June 17.

Inflation Outlook

The difference in yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, dropped yesterday to 1.97 percentage points, compared with the five-year average of 2.14.

The U.S. economy is poised to slow in the second half of 2010, keeping inflation “extremely low,” economists at the primary dealer Goldman Sachs Group Inc. including Ed McKelvey in New York wrote in a note to clients this week.

While the Fed will raise its target lending rate from a record low before the economy returns to “full employment,” Chairman Ben S. Bernanke said officials don’t know when the process will start in congressional testimony. The banking system isn’t fully healthy and lenders are “cautious” in providing credit, he said.

Record-low inflation and prolonged unemployment mean the central bank will hold off on raising interest rates until 2011, according to economists surveyed by Bloomberg News.

The Fed’s preferred consumer price gauge will rise 1.1 percent this year, the smallest gain in data going back to 1960, and the jobless rate will average more than 9 percent through next year, the median estimate of 65 economists in a Bloomberg News survey from June 2 to June 8 showed.

Bond Auction

An increase in yields on June 10 before a $13 billion 30- year bond auction boosted demand. At the sale, the bond drew a yield of 4.182 percent, the lowest since October, when the yield was 4.009 percent.

The $21 billion auction of 10-year notes a day earlier drew a yield of 3.242 percent, compared with the average forecast of 3.252 percent in a Bloomberg News survey of primary dealers. The $36 billion sale of three-year notes on June 8 attracted a yield of 1.220 percent, the lowest since January 2009.

“We don’t currently have a problem attracting investors to our debt,” Kevin Giddis, head of fixed-income sales, trading and research at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients this week.

European Central Bank President Jean-Claude Trichet said at a press conference in Frankfurt on June 10 that interest rates in the 16-nation euro region are “appropriate,” indicating he sees no immediate need to cut borrowing costs any time soon. Trichet, under pressure to give details on the bond purchases that the ECB is using to contain Europe’s sovereign-debt crisis, said the policy was “by construction temporary in nature.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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