Treasuries Snap Decline Before Europe GDP

Treasuries snapped a decline from yesterday 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 climbed to the highest level since May last week, they are still within 28 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 were little changed at 1.66 percent as of 12:26 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 22/32.

The rate increased one basis point, or 0.01 percentage point, yesterday. It was as high as 1.73 percent last week, climbing from the all-time low of 1.38 percent set July 25.

Thirty-year bonds yielded 2.75 percent, moving less than 1/2 basis point for a fourth day.

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.

Japan’s 10-year rate rose 1/2 basis point to 0.79 percent today. It has declined from this month’s high of 0.81 percent on Aug. 8.

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 Chancellor Angela Merkel plans to travel to Canada Aug. 15-16 for talks with Prime Minister Stephen Harper as a spiraling euro crisis threatens to constrain the global economy.

The Fed is scheduled today to buy $4.5 billion to $5.5 billion in Treasuries with maturities of eight to 10 years, according to the Fed Bank of New York website. The purchases are part of the central bank’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.

Sales at U.S. retailers increased 0.3 percent last month, following a 0.5 percent slide in June, according to a Bloomberg survey of economists before today’s Commerce Department data. A separate report will show producer prices increased in July, based on another survey.

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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