Treasuries Fluctuate as ECB Maintains Interest Rate

Treasuries fluctuated after the European Central Bank refrained from cutting interest rates before U.S. reports that economists said will show claims for jobless benefits increased while the unemployment held steady.

U.S. government securities due in 10 years and longer returned 9.5 percent in the past three months, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. The gain was the most among 144 debt indexes around the world after accounting for changes in bond prices and currencies, reflecting demand for the relative safety of U.S. debt due to slowing economic growth and Europe’s financial crisis. The European Central Bank is scheduled to meet today.

“Treasury yields are likely to stay low, at least in the near term,” said Stuart Thomson, who helps oversee about $115 billion as a money manager at Ignis Asset Management in Glasgow. “There have been a number of economic false dawns. Despite some recovery, the underlying trend of the U.S. economy remains pretty weak.”

The benchmark 10-year yield was little changed at 1.53 percent at 7:51 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 traded at 102 1/32. The yield increased six basis points, or 0.06 percentage point, yesterday. It dropped to a record 1.379 percent on July 25.

ECB Decision

ECB policy makers meeting in Frankfurt left the benchmark rate at a record low of 0.75 percent, as predicted by 51 of 55 economists in a Bloomberg News survey. Four predicted a cut to 0.50 percent. The deposit rate was held at zero. Central bank President Mario Draghi faces holds a press conference at 2:30 p.m. in Frankfurt.

The U.S. economy added 100,000 workers last month, following a gain of 80,000 in June, according to a Bloomberg survey of economists before tomorrow’s Labor Department report. The jobless rate will stay at 8.2 percent, according to economists. It has been more than 8 percent since February 2009. ADP Employer Services said yesterday the nation added more workers last month than economists forecast.

U.S. claims for jobless benefits rose to 370,000 last week from 353,000, based on responses from economists, before the Labor Department figure today. A separate report may show growth in factory orders slowed.

Gains in Treasuries were tempered amid speculation the euro-region’s bailout fund will have access to the ECB’s cash. Italian Prime Minister Mario Monti said today the European Stability Mechanism would gain access to the money through a bank license.

German Outlook

Germany retained a stable outlook for its top credit score at Standard & Poor’s, the ratings company announced today, just over a week after Moody’s Investors Service warned that the nation’s Aaa grade was at risk.

Moody’s on July 23 lowered the outlook for the credit ratings of Germany, the Netherlands and Luxembourg to negative, citing “rising uncertainty” over Europe’s debt woes.

Demand for German bonds as a haven has pushed yields on two-year notes down to negative 0.086 percent. Investors require 32 basis points of additional yield to buy same-maturity Treasuries, the biggest difference in two years.

Treasuries fell yesterday after the Federal Reserve refrained from boosting monetary stimulus while indicating a sluggish economy may prompt further steps to spur growth.

“They’re saving their limited remaining ammunition for a time when there’s more stress,” said Daniel Dektar, chief investment officer at Chapel Hill, North Carolina-based Smith Breeden Associates, which oversees $6.5 billion.

The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It is now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.

Draghi Pledge

The central bank is scheduled to buy as much a $2 billion of Treasuries due from February 2036 to May 2042 today as part of the plan, according to the Fed Bank of New York website.

There is a “significant chance” the Fed will implement a third round of quantitative easing at its September meeting as the economic data weaken, according to a report yesterday by Michael S. Hanson, U.S. economist at Bank of America Corp. in New York, and other economists and strategists at the company.

Draghi pledged July 26 to do “whatever it takes to preserve the euro,” raising speculation the bank will buy bonds issued by nations in the region.

“If the bank takes strong action, then Treasury yields will go up,” said Chungkeun Oh, who invests in bonds in the biggest markets for Industrial Bank of Korea (024110), South Korea’s largest lender to small- and medium-sized companies. “Demand for safe-haven assets is going to diminish.” Oh said he’s not convinced that will happen, and last week he unwound positions that would have benefited from rising rates.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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