Treasury 10-Year Yields Drop From 3-Month High on Refuge Appeal

Treasury 10-year note yields fell from a three-month high after a decline in U.S. stocks renewed government securities’ haven appeal as investors debate whether European leaders will be able to curb the region’s debt crisis.

Bonds slumped earlier for the first time in three days, pushing up yields, on speculation a proposal to ease Greece’s bailout terms will help curb the financial turmoil and amid waning bets the U.S. will add further stimulus. The Federal Reserve will release minutes tomorrow of its July 31-Aug. 1 policy meeting.

“It’s the flight-to-quality bid that continues to drive Treasuries,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Europe is always lurking in the background.”

Ten-year note yields were at 1.80 percent at 5:10 p.m. New York time, down less than one basis point, or 0.01 percentage point, according to Bloomberg Bond Trader prices. They climbed six basis points earlier to 1.86 percent, the highest intraday level since May 11, matching their 200-day moving average. The price of the 1.625 percent security due in August 2022 rose 2/32, or 63 cents per $1,000 face amount, to 98 13/32.

“There’s strong support at the 200-day moving average,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That brought buyers back into the market.” Support is an area on a chart where buy orders may be clustered.

Long Bonds

Thirty-year bond yields decreased two basis points to 2.90 percent after rising earlier to 2.98 percent, exceeding their 200-day moving average of 2.96 percent

The Standard & Poor’s 500 Index fell 0.4 percent after sliding from a four-year high as a drop in technology shares tempered optimism euro-area leaders will make progress on resolving their debt crisis.

The euro rose as much as 1.2 percent to $1.2488, the strongest since July 5, in New York trading. Spanish and Italian government bonds gained amid speculation the European Central Bank will buy them to help contain the crisis.

Concessions are possible for Greece, where Europe’s debt crisis began more than two years ago, as long as Prime Minister Antonis Samaras shows a willingness to meet the main targets set out in his country’s bailout program, Norbert Barthle, budget spokesman for German Chancellor Angela Merkel’s Christian Democratic Union, said in a phone interview today.

Luxembourg Prime Minister Jean-Claude Juncker, head of euro-bloc finance ministers, is scheduled to visit Greece tomorrow. Merkel and French President Francois Hollande meet in Berlin on Aug. 23.

European ‘Jawboning’

“Those meetings may propel some sort of volatility, and it could be carried into the Treasury market,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “There’s a lot of jawboning coming out of Europe about bond buying.”

Volatility was little changed from yesterday at 70 basis points in New York. The figure is below the 2012 average of 75 basis points, according to Bank of America Merrill Lynch’s MOVE index. Volatility dropped to a five-year low of 56.7 basis points on May 7 and touched a 2012 high of 95.4 basis points on June 15. The index measures price swings based on options.

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to about $206 billion after falling yesterday to $140 billion, the lowest level since May 7. The daily volume has averaged $239 billion this year.

Home Sales

Bonds fell earlier before data tomorrow that will show U.S. purchases of existing homes rose 3.2 percent in July from the month before, when they slid 5.4 percent, according to a Bloomberg News survey. Sales of new homes increased 4.3 percent last month, following an 8.4 percent decline in June, according to a separate poll. That report will be released Aug. 23.

Fed Bank of Atlanta President Dennis Lockhart said U.S. policy makers face a risk of easing too much while trying to spur a “disappointing” three-year-old economic recovery.

“There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources,” Lockhart said today in a speech in Atlanta.

The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of quantitative easing to spur economic growth.

Fed Sale

The central bank sold $7.8 billion of Treasuries today due from October 2014 to April 2015. The sale was part of Chairman Ben S. Bernanke’s effort to swap shorter-term Treasuries in the central bank’s holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.

The U.S. is scheduled to announce on Aug. 23 the sizes of its auctions next week of two-, five- and seven-year notes.

It will probably sell $35 billion of two-year debt on Aug. 28, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30, according to Wrightson ICAP LLC, an economic advisory company based in Jersey City, New Jersey.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for the rate of inflation over the life of the securities and is known as the break-even rate, increased one basis point to 2.26 percentage points today, above the 2012 average of 2.19 percentage points. It touched 2.34 percentage points on Aug. 9, the highest since April.

Turning Point

The August slump in bonds is poised to end, based on a Bloomberg survey of economists. Ten-year yields will be at 1.78 at Dec. 31, according to the responses, with the most recent projections given the heaviest weightings.

Investors in Treasuries held on to wagers in the past week that the prices of the securities will increase even as yields climbed, according to a survey by JPMorgan Chase & Co.

The proportion of net longs, or bets the securities will rise, was steady at 10 percentage points in the week ending yesterday. The percent of outright longs was unchanged at 19 percent for the second straight week, while the percent of outright shorts, or bets the securities will fall in value, held steady at 9 percent, the lowest level since February, according to the survey.

Investors left neutral bets unchanged at 72 percent for the third straight week, the survey reported.

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

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