Treasuries Little Changed Before Europe GDP Report

Treasuries were little changed before data analysts said will show the euro area’s economy contracted in the second quarter, supporting demand for the relative safety of U.S. government securities.

While benchmark 10-year yields last week climbed to the highest level since May, they are still within 29 basis points of the record low. Columbia Management Investment Advisers LLC, which oversees $331 billion, said the increase in rates probably won’t lead to sustained weakness in the market.

“Treasuries seem a little bit oversold,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers authorized to deal with the Federal Reserve. “Over the next day, I expect yields to drop. European growth is going to be weaker.”

Ten-year yields held at 1.67 percent as of 7:28 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 19/32.

The rate was as high as 1.73 percent last week, climbing from the all-time low of 1.38 percent set July 25. The 30-year bond yield added one basis point to 2.76 percent.

Japan’s 10-year rate rose 1/2 basis point to 0.79 percent.

Volatility dropped for a third session yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, slid to 67.2 from 2012’s high of 95.4 in June. The average over the past decade is 101.14.

Europe Shrinking

Gross domestic product in the euro area probably contracted 0.2 percent in the three months through June 30 after being unchanged in the first quarter, according to the median forecast of economists in a Bloomberg News survey. The European Union’s statistics office is scheduled to report the data today.

German gross domestic product rose 0.3 percent in the second quarter from the first, the Federal Statistics Office said in Wiesbaden today. Economists predicted a 0.2 percent increase, based on a Bloomberg survey before the report.

France’s gross domestic product was unchanged in the second quarter from the first, the national statistics office in Paris said today in an e-mailed statement.

The Fed is scheduled today to buy as much as $5.5 billion in Treasuries with maturities of eight to 10 years, according to the website of the central bank’s New York branch. The purchases are part of the Fed’s effort to support the economy by putting downward pressure on long-term interest rates.

‘Sluggish Pace’

“The main factors behind the lower interest rate environment -- the sluggish pace of the recovery, easing by the Federal Reserve, and the European crisis -- have not meaningfully changed,” Zach Pandl, the Minneapolis-based senior interest-rate strategist at Columbia Management, wrote on the company’s website yesterday.

The U.S. central bank has held its target for overnight bank lending in a range of zero to 0.25 percent since 2008 and plans to keep it there at least through late 2014 to stimulate the world’s biggest economy. The Fed also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing.

Signs of improvement in the U.S. economy have the potential to send yields higher, said Andy Cossor, a Hong Kong-based market strategist at DZ Bank AG, Germany’s fourth-largest lender.

Retailing, Inflation

Sales at U.S. retailers probably increased 0.3 percent last month, according to a Bloomberg survey of economists before today’s Commerce Department data. That would follow a 0.5 percent slide in June.

A report today on producer prices and data tomorrow on consumer prices may show costs increased in July, separate surveys showed.

The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.25 percentage points. The average over the past decade is 2.15 percentage points.

“I wouldn’t be surprised to see the recent trend in higher yields in Treasuries being extended if the U.S. data come in little bit better than expected,” Cossor said.

The U.S. added 163,000 jobs in July, a government report showed Aug. 3, more than the 100,000 projected by analysts.

The data helped send Treasuries to a 0.7 percent loss this month as of yesterday, based on returns compiled by Bank of America Merrill Lynch.

The MSCI All-Country World Index (MXWD) of stocks handed investors a 2.2 percent gain in the period, including reinvested dividends, according to data compiled by Bloomberg. Commodities as measured by the S&P GSCI Total Return Index climbed 3 percent.

Ten-year yields will be 1.66 percent by Sept. 30, little changed from today’s level, according to a Bloomberg survey of economists, with the most recent projections given the heaviest weightings.

To contact the reporter on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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