Treasuries Drop as U.S. Economic Reports Overshadow Europe’s Debt Turmoil

Treasuries fell, with 30-year yields increasing the most in a week since October, as reports showing the U.S. economy is strengthening offset concern Europe is struggling to contain its sovereign-debt crisis.

Ten-year yields touched the highest level in more than a week as sales of new homes in the U.S. rose to a seven-month high and durable-goods orders increased. Reports yesterday showed consumer confidence climbed and initial claims for jobless benefits unexpectedly fell, cutting safety demand.

“There’s a positive feedback loop emerging in the economy,” said Carl J. Riccadonna, economist in New York at Deutsche Bank AG, one of 21 primary dealers that trade with the Federal Reserve. “People are still optimistic about the broader economy. There’s evidence of positive feedback that will hopefully intensify in the next year. Markets are so thin now.”

The 30-year bond yield climbed eight basis points, or 0.08 percentage point, to 3.06 percent at 2 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 3.08 percent, the highest level since Dec. 13, The 3.125 percent securities due in November 2041 dropped 1 1/2, or $15 per $1,000 face amount, to 101 10/32. The yield increased 21 basis points this week, the most since the five days ended Oct. 14.

The long-bond yield has fallen from a 2011 high of 4.79 percent in February as investors have sought safety amid Europe’s debt crisis and concern the U.S. economy would founder.

Most in Three Years

Today’s increase pared 30-year yields’ drop this year to 127 basis points, which still would be the biggest annual reduction since 2008. The securities have returned 33 percent in 2011, more than triple the 9.3 percent gain in the broader Treasury market, Bank of America Merrill Lynch indexes showed.

Yields on 10-year notes increased eight basis points today to 2.02 percent and touched 2.04 percent, also the highest level since Dec. 13. They gained 18 basis points this week.

Policy makers in Europe shouldn’t shirk from using quantitative easing to spur growth if deflation becomes a danger to the euro region amid its sovereign-debt turmoil, European Central Bank Executive Board member Lorenzo Bini Smaghi said in an interview published yesterday by the Financial Times. Juergen Stark, another board member, told Germany’s Die Welt newspaper in an interview published today the central bank doesn’t “have a mandate” for unlimited purchases of government bonds.

“Europe continues to be a driver,” said Justin Lederer, an interest-rate strategist in New York at the primary dealer Cantor Fitzgerald LP. “These issues aren’t going to go away any time soon. Until we get clarity, the safe-haven bid will remain. It’s one step forward, two steps back in many cases.”

Lower Volume

About $130 billion of Treasuries changed hands yesterday through ICAP Plc, the world’s largest interdealer broker. The amount was the least on a daily basis since Nov. 25 and below the 2011 average of $288 billion. The Securities Industry and Financial Markets Association recommended that trading of Treasuries end today at 2 p.m. New York time and that markets be closed on Dec. 26 in observance of the Christmas holiday.

“It’s just very light holiday trading, and next week will be the same,” Cantor’s Lederer said.

The yield difference between 10-year Treasuries and inflation-protected debt, a measure of the outlook for consumer prices known as the break-even rate, increased to 2.08 percent, the widest in more than two weeks on a closing basis.

Home Sales

Treasury yields increased as Commerce Department data showed purchases of single-family properties last month increased 1.6 percent to a 315,000 annual pace. Bookings for equipment meant to last at least three years rose 3.8 percent in November, compared with no change in the prior month, the department said.

Consumer purchases rose 0.1 percent for a second month, separate Commerce Department data showed. Adjusted for inflation, the figure used to calculate gross domestic product, consumer spending rose 0.2 percent for a second month. The median estimate for spending in a Bloomberg News survey of economists called for a 0.3 percent advance.

U.S. consumer confidence increased to a six-month high of 69.9 in December in a Thomson Reuters/University of Michigan index released yesterday.

Labor Department data yesterday showed initial jobless claims fell by 4,000 to 364,000 last week, versus a forecast in a Bloomberg survey for an increase to 380,000.

Volatility in the Treasury market has dropped. Bank of America Merrill Lynch’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, fell to 90.2 yesterday, approaching the lowest level since August. The 2011 average is 94.2, with a high of 117.8 on Aug. 8 and a low of 71.5 on May 31.

The yield on the 30-year bond will increase to 3.36 percent by the end of June, according to the average forecast of banks and securities companies surveyed by Bloomberg, with the most recent forecasts given the heaviest weightings. The 10-year note yield may climb to 2.32 percent, a separate survey showed.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net