U.S. Yields Rise From Lowest in a Month; Debt Tops $16T

Treasuries fell, pushing 10-year note yields up from the lowest level in almost a month, amid bets the European Central Bank will announce measures as soon as this week to ease the euro region’s debt crisis.

Yields pared increases after the Institute for Supply Management’s index of U.S. manufacturing unexpectedly fell in August, adding to speculation the economy is faltering and the Federal Reserve may buy more bonds. U.S. total debt outstanding rose past $16 trillion. ECB President Mario Draghi said yesterday the bank’s primary mandate compels it to intervene in bond markets to ensure the 17-nation currency’s survival.

“Draghi has been very loud and outspoken about his desire to see bond buying, and that has given the market some hope, which has weighed on Treasuries some,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “But until you get an actual program announced and agreed upon, it’s hard to believe any rhetoric coming out of Europe.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.57 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The yield touched 1.54 percent, the lowest level since Aug. 6, before increasing to 1.59 percent before the factory data. The price of the 1.625 percent note due in August 2022 declined 7/32, or $2.19 per $1,000 face amount, to 100 15/32.

Ten-year yields reached a record low 1.38 percent on July 25, and rose to a three-month high of 1.86 percent on Aug. 21.

Thirty-year bond yields increased one basis point to 2.68 percent after earlier touching 2.65 percent, the lowest since Aug. 7, and rising to as high as 2.71 percent. The long-bond yields reached a record low 2.44 percent on July 26, and climbed on Aug. 16 to 2.98 percent, the highest since May.

Total Debt

Bond yields continued to hover at almost record lows even as the U.S. Treasury statement and cash balance for Aug. 31 showed total public debt outstanding swelled to $16.02 trillion. The figure, which includes debt held by the public and intragovernmental holdings, was $9 trillion in 2007.

The Fed bought $6.4 billion of U.S. government debt today in two purchases as part of its effort to cap longer-term borrowing costs.

Treasuries trimmed losses after the Institute for Supply Management’s U.S. factory index fell to 49.6 in August from 49.8 a month earlier. It was the third straight month of contraction. Economists in a Bloomberg survey projected a reading of 50, which is the dividing line between expansion and shrinkage. The Tempe, Arizona-based group’s gauge averaged 55.2 in 2011 and 57.3 a year earlier.

No Support

“The data doesn’t support the idea that the economy is going to be meaningfully different in the second half of the year,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There is still a ton of uncertainty coming from Europe.”

U.S. government securities were at almost the most expensive level in a month. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.93 percent, near the most costly since July 31. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.73 percent.

ECB Purchases

Draghi, mounting his strongest case yet for ECB bond purchases, told lawmakers in a closed-door session at the European Parliament in Brussels yesterday the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday.

The ECB chief said if the bank buys bonds due in three or fewer years, they “will easily expire, so there is very little monetary financing if anything at all that we are doing.”

Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund, said in a Twitter post that Draghi “appears willing to write two- to three-year ‘checks’” to debt-strapped euro-bloc nations. He called such a move reflationary.

The ECB’s Governing Council is due to consider this week Draghi’s bond-buying proposal, expectations for which have already driven down yields in Italy and Spain. The bank will announce a policy decision on Sept. 6.

Treasuries have returned 2.6 percent this year, Bank of America Merrill Lynch index data show. That compares with a 14 percent gain in the Standard & Poor’s 500 Index, including reinvested dividends.

Bernanke Speech

Fed Chairman Ben S. Bernanke, speaking Aug. 31 at an economics conference in Jackson Hole, Wyoming, said the costs of “nontraditional policies” appear manageable when considered carefully.

Bernanke said he wouldn’t rule out steps to lower a jobless rate he described as a “grave concern.” U.S. payrolls probably grew at a slower pace in August and unemployment exceeded 8 percent for a 43rd month, economists forecast before Labor Department data this week.

The central bank bought $2.3 trillion of securities from 2008 to 2011 in two rounds of the stimulus strategy known as quantitative easing. The policy-setting Federal Open Market Committee will meet Sept. 12-13.

The Fed is also in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to help lower long-term borrowing costs.

The central bank bought $1.8 billion of Treasuries today due from February 2036 to August 2042, and purchased $4.6 billion of U.S. debt due from September 2018 to August 2020.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, has averaged 2.54 percent this year. That’s the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast 10-year government notes will yield 1.76 percent by Dec. 31.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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