Treasury 10-Year Notes Decline as U.S. Growth Signs Reduce Safety Demand

Treasury 10-year notes declined for a second day as signs the U.S. economy is gathering momentum eased concern that the European debt crisis is weighing on American growth.

Longer-maturity bonds led losses before a government report that economists said will show consumer prices increased in November. Manufacturing in the New York and Philadelphia regions improved this month, according to reports released yesterday. Federal Reserve Bank of New York President William C. Dudley said he doesn’t foresee the U.S. central bank taking additional steps to curb the impact of Europe’s sovereign-debt crisis.

“It’s a bit of risk very lightly creeping back on, and that’s just taking some of the wind out of Treasuries’ sails,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Demand is there across all the markets so that should keep the front end of the Treasury curve relatively underpinned and 10-years will probably take most of the strain if we do see some decent data.”

The 10-year yield rose two basis points, or 0.02 percentage point, to 1.93 percent at 11:12 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 fell 1/8, or $1.25 per $1,000 face amount, to 100 21/32. The 30-year yield increased one basis point to 2.93 percent.

Stocks Gain

The Stoxx Europe 600 Index advanced 0.2 percent, and futures on the Standard and Poor’s 500 index expiring in March gained 0.6 percent.

U.S. consumer prices climbed 0.1 percent in November from a month earlier, and gained 3.5 percent versus a year earlier, according to a Bloomberg News survey before today’s data. Prices fell 0.1 percent in October.

U.S. reports yesterday showed applications for jobless benefits fell to the lowest level since May 2008, and manufacturing in the New York and Philadelphia regions improved in December.

“U.S. economic indicators are resilient,” said Yoshinori Shigemi, a strategist at RBS Securities Japan Ltd. in Tokyo, a unit of Royal Bank of Scotland Group Plc. “Should an easing of European tensions spur risk-on sentiment in markets and U.S. economic data show significant improvement, there’s a decent chance 10-year yields will touch 2.4 percent.”

The 10-year yield will climb to 2.17 percent by March 31, according to the Bloomberg average forecast from banks and securities companies with the most recent forecasts given the heaviest weightings.

Inflation Debt

Inflation-linked debt has returned 14 percent to investors this year, set for the biggest annual gain since 2002, according to an index compiled by Bank of America Merrill Lynch. U.S. government debt has handed investors 9.6 percent in the same period, including reinvested interest, the index shows.

Treasuries still headed for the biggest weekly advance in a month on concern European countries are struggling to contain the region’s debt crisis, boosting demand for U.S. government debt as a haven.

“The U.S. has attractions as a haven, so Treasury yields will continue to be weighed down,” RBS’s Shigemi said. “Market participants are focused on headlines about developments in Europe.”

Benchmark 10-year yields fell 15 basis points this week, the biggest decline since the period ended Nov. 4.

Debt Sales

The government is scheduled to sell $35 billion of two-year notes on Dec. 19, the same amount of five-year securities the next day and $29 billion of seven-year debt on Dec. 21.

The two-year notes on offer next week yielded 0.23 percent in pre-auction trading, compared with 0.28 percent at the prior sale in November. Investors bid for 4.07 times the amount for sale last month, more than the average of 3.38 for the past 10 auctions.

The Fed is replacing $400 billion of shorter maturities in its holdings of Treasuries with longer-term debt to cap borrowing costs in a plan it announced in September. The central bank is today scheduled to buy as much as $2.75 billion of debt due from 2036 to 2041, and up to $5 billion of notes maturing between 2020 and 2021 as part of the program, according to the New York Fed’s website.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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