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Treasury Futures Decline as Recovery Signs Offset European Debt Concerns

Treasury futures fell for a second day amid speculation the global economy will weather Europe’s sovereign-debt crisis, curbing demand for the safest assets.

Benchmark 10-year yields approached a one-week high yesterday after a report showed Europe’s industrial production increased in April by more than economists had forecast. Data this week are forecast to show manufacturing in the New York region grew and U.S. industrial production rose. Asian stocks rose and the cost of protecting Japanese and Australian bonds from non-payment declined even as Moody’s Investors Service downgraded Greece to below investment grade yesterday.

“Investors are gradually shifting attention back to economic fundamentals, which are signaling continued improvement,” said Tsuyoshi Segawa, a strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “Capital flight into safer assets such as bonds is also beginning to weaken.”

The September futures contract for Treasuries fell 3/32, or $0.94 per $1,000 face amount, to 120 7/32 as of 6:30 a.m. in London, according to the Chicago Board of Trade.

The yield on the 10-year note rose one basis point to 3.27 percent, according to BGCantor Market Data. The price of the 3.5 percent security due May 2020 fell 2/32 to 101 30/32. Yields reached 3.32 percent yesterday, the highest since June 4.

The Federal Reserve Bank of New York’s general economic index rose to 20.0 in June from 19.11 in the previous month, according to a Bloomberg News survey of economists ahead of the data’s release today. Production at factories, mines and utilities increased 0.9 percent in May, according to a separate survey before the Fed releases the figures on June 16.

European Output

A leading indicator for the Chinese economy, the world’s third biggest, rose “sharply” in April on a jump in new construction work, the Conference Board said. The measure gained 1.7 percent to 147.1, compared with a revised 1.2 percent increase in March, the New York-based research organization said on its website today.

Output in the euro-region economy rose 0.8 percent from March, the European Union’s statistics office in Luxembourg said yesterday. Economists had projected a gain of 0.5 percent.

The German 10-year bund yield, the euro-area’s benchmark security, climbed seven basis points to 2.64 percent yesterday.

Asian stocks reversed earlier declines and futures on the Standard & Poor’s 500 Index rose, weakening the refuge appeal of U.S. government securities.

The MSCI Asia Pacific Index of regional share gained 0.2 percent after earlier losing as much as 0.3 percent and futures on the S&P 500 Index rose 0.3 percent.

The Markit iTraxx Australia index decreased four basis points to 137 basis points, Westpac Banking Corp. prices show. The Markit iTraxx Japan index fell one basis point to 143, Morgan Stanley prices show.

Credit-default swap indexes are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.

‘Muted Reaction’

Moody’s cut Greece’s rating to Ba1, or junk, from A3, citing “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the EU and the International Monetary Fund.

“Investors have already priced in the likelihood of a default on Greek bonds by sending the euro to a four-year low,” said Hideyuki Suzuki, Tokyo-based general manager of investment market research department at SBI Securities Co., a unit of financier SBI Holdings Inc. “That’s why investors showed a rather muted reaction to the latest rating action.”

Greece, which already was rated junk by Standard & Poor’s, said the Moody’s downgrade “does not reflect in any way Greece’s progress over the past months,” according to a statement from the Finance Ministry in Athens.

Budget Deficits

The EU announced last month a rescue package of almost $1 trillion, with support from the IMF, to shore up the finances of the region’s weakest economies amid concern that governments will struggle to narrow their budget deficits.

Treasuries have returned 4.2 percent since the start of this year, according to indexes from Bank of America Corp.’s Merrill Lynch unit. German bunds have returned 6.5 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The euro has fallen 9.3 percent this year versus its developed-world counterparts, Bloomberg Correlation-Weighted Indexes show.

Europe’s sovereign-debt crisis shouldn’t postpone the Fed from raising interest rates, Fed Bank of St. Louis President James Bullard told reporters in Tokyo yesterday. His comments contrast with Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart, who have in recent weeks said European turmoil may slow any U.S. boost in borrowing costs.

The Fed will probably take “significant” time to shift toward tighter monetary policy as long as the economy takes years to reach full employment and inflation is low, said the Fed’s regional bank in San Francisco.

RBA Minutes

Taking into account the effects of the Fed’s asset purchases, “the recommended period of a near-zero funds rate would end at the beginning of 2012,” Glenn Rudebusch, the bank’s associate director of research, wrote in a paper released yesterday.

The Reserve Bank of Australia said in minutes from this month’s policy meeting that Europe’s debt crisis would “inevitably weigh” on global growth prospects and that previous rate increases gave them “flexibility” to examine the impact of European events.

For Related News and Information:
Bond yield forecasts: BYFC <GO>
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Short-term liquidity SLIQ <GO>
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