Treasuries Rise a 2nd Day as Oil Gains, S&P 500 Retreats

Treasury 10-year notes rose for a second day as investors took advantage of a surge in yields, while oil jumped above $107 a barrel and U.S. stocks fell. The dollar strengthened against most major peers.

Ten-year Treasury yields decreased seven basis points to 2.29 percent at 4 p.m. in New York after yesterday falling for the first time in 10 days, halting the longest increase since 2006. The Standard & Poor’s 500 Index decreased 0.2 percent to 1,402.89 after yesterday retreating from the highest level in almost four years. Spanish bonds slid amid concern the nation faces an increasing risk of a debt restructuring.

Federal Reserve Chairman Ben S. Bernanke said the increase in oil may slow economic growth, at least in the short term. The Fed bought $4.03 billion in U.S. debt today as part of its program to swap $400 billion of shorter-term securities with longer-term bonds. Goldman Sachs Group Inc. said in a report that global stocks are set to follow a “steady upward trajectory,” and prospects for equities versus bonds are “as good as they have been in a generation.”

“Even though the U.S. data is picking up, it’s picking up from very low levels, and the housing market still has a lot of problems to deal with, which is why Treasury yields are still at these low levels,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of 21 primary dealers that trade with the Fed. “There are still Fed purchases this week and the sharp sell-off has stopped. And we are seeing investors start to take advantage of the higher rates.”

Treasuries, Equities

Ten-year and 30-year Treasury yields decreased for a second day after reaching the highest levels since October and September, respectively, on reduced speculation the Fed will announce another round of bond purchases. Ten-year yields surged 44 basis points in the nine sessions ended March 19. Two-year Treasury note yields lost three basis points to 0.37 percent today, while 30-year rates slipped seven points to 3.38 percent.

New York oil rebounded after falling 2.3 percent yesterday. The U.S. Energy Department said crude inventories unexpectedly dropped by 1.16 million barrels last week.

Bernanke and his colleagues on the Federal Open Market Committee are watching oil and gasoline prices that threaten U.S. growth and are likely to push up inflation “temporarily,” according to their statement last week, when they said interest rates are likely to remain near zero through at least late 2014.

Bernanke Speaks

“Higher energy prices would probably slow growth, at least in the short run,” Bernanke said today in response to questions from the House Committee on Oversight and Government Reform. Rising fuel prices “create at least short-term inflation pressures, and moreover, they act as a tax on household purchasing power and reduce consumption spending, and that also is a drag on the economy.”

Bernanke also said the Fed has reviewed the credit-default swaps or contracts that U.S. banks have used to insure against defaults in Europe, and that they are “widely dispersed.” The central bank doesn’t expect a repeat of 2008, when American International Group Inc., a large counterparty on swaps, collapsed, Bernanke said.

Among U.S. stocks, energy and financial companies led losses among 10 groups in the S&P 500. Baker Hughes Inc. (BHI), the world’s third-largest oilfield-services provider, tumbled 5.8 percent after saying it expects operating profit before tax for the first quarter will fall as producers shift drilling from natural gas to crude. Hewlett-Packard Co., Alcoa Inc. and Caterpillar Inc. fell at least 1.6 percent to lead losses in the Dow Jones Industrial Average (INDU), which slipped 45.57 points to 13,124.62.

‘Internal Energy’

The S&P 500 has rallied almost 12 percent so far this year, poised for its best first quarter since 1998. Gains were triggered by a decline in the unemployment rate to a three-year low, growth in manufacturing and Europe’s efforts to tame its debt crisis.

The benchmark gauge of American equities closed at the highest level since May 2008 on March 19, while the S&P SmallCap 600 Index reached a record and the Nasdaq Composite Index rallied to an 11-year high that day.

“People won’t play real hard at these levels,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview. His firm oversees more than $300 billion. “I’m still pretty bullish. I don’t think you get bearish. Yet the market’s internal energy seems to be used up after the strong rally.”

Goldman Backs Rally

Goldman Sachs said the rally in stocks is set to continue for the next few years because any declines in economic growth are already reflected in share prices.

“Given current valuations, we think it’s time to say a ‘long good-bye’ to bonds, and embrace the ‘long good buy’ for equities as we expect them to embark on an upward trend over the next few years,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs in London, wrote in a report today.

The prospects for returns in equities versus bonds “are as good as they have been in a generation,” he wrote.

A gauge of 11 homebuilders in S&P indexes advanced, halting a three-day slump. Sales of previously owned U.S. houses held in February near an almost two-year high, adding to signs the market that triggered the recession is firming. Purchases dropped 0.9 percent to a 4.59 million annual rate from a revised 4.63 million pace in January that was faster than previously estimated and the highest since May 2010, the National Association of Realtors said. The median price rose over the past year for the first time since November 2010.

Dollar, European Markets

The dollar strengthened against 11 of 16 major peers, climbing 0.1 percent to $1.3209 versus the euro.

The Stoxx Europe 600 Index slipped 0.1 percent. Banco Popolare SC (BP), Italy’s fifth-biggest bank, gained 3.3 percent after saying its core Tier 1 ratio, a key measure of financial health, rose to 7.1 percent. J Sainsbury Plc (SBRY) climbed 4.5 percent as the U.K.’s third-largest supermarket owner reported fourth- quarter sales growth that beat estimates.

The German 10-year bund rose, driving the yield six basis points lower to 1.98 percent. Spanish bonds fell, pushing 10- year yields to the highest level in a month, after Citigroup Inc. chief economist Willem Buiter said the nation faced an increasing risk of a debt restructuring.

Ten-year Spanish securities slid for an eighth day, sending their yield up 18 basis points to 5.41 percent and widening the extra yield over similar-maturity German bunds by 24 basis points to 3.43 percentage points.

‘Most Worried’

Spain is at “a greater risk than ever before” of a debt restructuring, Citigroup’s Buiter said in an interview with Tom Keene and Ken Prewitt on Bloomberg Radio. “Spain is the key country about which I’m most worried.” The country has “moved to the wrong side of the spectrum,” he said.

The MSCI Emerging Markets Index slipped 0.1 percent, falling for a fifth straight day. The Hang Seng China Enterprises Index of Chinese shares listed in Hong Kong fell 0.9 percent, its sixth straight decline in its longest losing streak of the year.

The Kospi Index slid 0.7 percent in Seoul, as Hyundai Steel Co. (004020) fell 3.4 percent on concern over falling growth in China. The BSE India Sensitive Index, or Sensex, added 1.7 percent as overseas funds bought a record amount of local shares.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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