Treasuries Advance as U.S. Housing Starts, Producer Prices Declined in May

Treasury 10-year notes rose for the first time in three days as reports showed housing starts fell in May the most in more than a year and producer prices dropped.

The gain sent the yield down from almost the highest level since June 4 on evidence the U.S. recovery is stalling. The euro fell from a two-week high as Spain, the International Monetary Fund, the European Union and the U.S. Treasury dismissed a report in the newspaper El Economista that the Iberian nation is seeking a 250 billion euro ($307 billion) credit line.

“The housing number was weaker than expected,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of 18 primary dealers that trade directly with the Federal Reserve. “The landscape is getting weaker, which suggests lower rates from here.”

The yield on the 10-year note dropped four basis points, or 0.04 percentage point, to 3.26 percent at 4 p.m. in New York, according to BGCantor Market Data. The yield earlier rose to 3.31 percent, within two basis points of the highest level since June 4. The 3.5 percent security maturing in May 2020 rose 11/32, or $3.44 per $1,000 face amount, to 101 31/32.

The 10-year note’s yield fluctuated with stocks. The Standard & Poor’s 500 Index ended the day little changed after rising 0.3 percent and falling as much as 0.7 percent.

The euro traded at $1.2307 after rising to $1.2353, matching the level on June 1. The yield premium investors demand to hold Spanish 10-year government bonds instead of German bunds rose to a euro-era record, widening to 217 basis points.

‘No Truth’

There’s “no truth” to speculation that the IMF is preparing an emergency credit line for Spain, IMF spokeswoman Simonetta Nardin said. IMF Managing Director Dominique Strauss- Kahn said he’s going to Spain on a working visit.

Spain’s central bank said today it plans to publish the results of stress tests carried out at the nation’s lenders in an effort to boost confidence in the country’s financial system.

Treasuries have returned 4.2 percent since the start of the year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds have returned 6.5 percent, while Spanish securities have lost 3.6 percent, the indexes show.

“The worries about the euro zone and the speed in which the U.S. recovery is currently moving has almost ‘forced’ investors back into the Treasury market,” Kevin Giddis, president of fixed income in Memphis, Tennessee, at the brokerage firm Morgan Keegan Inc., wrote in a research note to clients. Investors “would rather have their money safe and close rather than chasing a higher yield,” he wrote.

Producer Prices

Prices paid to U.S. factories, farmers and other producers dropped 0.3 percent last month, the Labor Department reported. Housing starts fell 10 percent in May to a 593,000 annual pace in the biggest decline since March 2009, Commerce Department figures showed.

Futures on the CME Group Inc. exchange show a 28 percent chance the Fed will raise its benchmark rate by at least a quarter-percentage point by its December meeting, down from 40 percent odds a month earlier.

The U.S. central bank lowered its fed funds target rate to a range of zero to 0.25 percent in December 2008 to reduce borrowing costs and help stimulate the economy. The Federal Open Market Committee is next scheduled to deliver a policy decision on June 23.

“Inflation is still benign, and no inflation pressure means the Fed has no reason to think about moving rates any time soon,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “The euro is weaker, which is encouraging flight-to-quality pressure into Treasuries.”

Fed Economic Outlook

Fed officials may reduce their 2010 estimates by “several tenths” of a percentage point and as much as 0.75 point for 2011, former Fed Governor Lyle Gramley said in an interview. That would mark a reversal from April, when officials raised their projections for this year to a range of 3.2 percent to 3.7 percent and left 2011 and 2012 forecasts little changed.

The new estimates are likely to reinforce the Fed’s pledge, in place since March 2009, that interest rates will stay low for an “extended period,” said former Fed researcher John Ryding.

The Treasury 10-year note yield is poised to drop below its lowest level this year as its trend lines form a “bullish triangle pattern,” according to Nomura Holdings Inc., citing technical analysis.

“The chart pattern suggests the market will try to push toward the low yield of the range again,” said Walter Burke, a fixed-income technical strategist in New York at Nomura, a primary dealer. “The market is signaling there will be a breaking-down to new yield lows, below 3.06 percent and possibly toward 3 percent.”

The 10-year note’s yield fell on May 25 to 3.06 percent, the lowest level since April 2009. A triangle pattern is formed when upper and lower trend lines intersect.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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