Treasuries Fall Amid ECB’s Crisis Plan, Inflation Concern

Treasury yields rose for the first time in three weeks as European officials detailed plans to curb the region’s debt crisis and investors braced for more stimulus from the Federal Reserve as the U.S. economic recovery falters.

Thirty-year bond yields climbed the most on concern the announcement of a third round of debt buying at next week’s Fed policy meeting may lead to an acceleration in inflation. The U.S. will also sell $66 billion of notes and bonds next week. Fed policy makers meet Sept. 12-13.

“In the short-term, it’s pretty straightforward,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the central bank. “We’ll get a purchase announcement at the next Fed meeting.”

Thirty-year yields advanced 15 basis points, or 0.15 percentage point, to 2.83 percent this week in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent securities due in August 2042 dropped 3 3/32, or $30.94 per $1,000 face value, to 98 1/2. Ten-year note yields increased 12 basis points to 1.67 percent.

Yields on 10- and 30-year securities each slid 26 basis points over the previous two weeks amid speculation the Fed would buy more debt. The 10-year yield is now 29 basis points above the record low of 1.379 percent reached on July 25. It touched a three-month high of 1.86 percent on Aug. 21. Long-bond yields reached a record low 2.44 percent on July 26.

Net Longs

Hedge-fund managers and other large speculators more than doubled their net-long position in 10-year note futures in the week ended Sept. 4 to the highest level in more than four years, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 108,685 contracts on the Chicago Board of Trade, the most since March 2008. Net-long positions rose by 57,993 contracts, or 114 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Treasury notes gained yesterday for the first time in four days, paring their weekly loss, as U.S. job growth slowed more than forecast. Payrolls data boosted bets the central bank will add more stimulus to the economy through bond purchases under the quantitative-easing stimulus strategy as soon as next week.

Employers added 96,000 positions in August, versus a Bloomberg News survey’s forecast of 130,000 jobs and a revised July increase of 141,000 that was lower than first reported. The unemployment rate remained above 8 percent for a 43rd month.

‘Grave Concern’

Fed Chairman Ben S. Bernanke, citing unemployment as a “grave concern,” said Aug. 31 the central bank stands ready to provide additional support. Speaking at an economics conference in Jackson Hole, Wyoming, he said the costs of “nontraditional policies” to spur the economy appeared manageable when considered carefully. He has also pledged to keep borrowing costs low into 2014.

The central bank bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of quantitative easing. It has kept its benchmark rate at zero to 0.25 percent since December 2008.

Five- and seven-year notes led gains yesterday as traders speculated mortgage investors will look to Treasuries as a hedge with the Fed likely to increase purchases of similar-maturity housing bonds.

‘Next Week’

“QE is coming next week,” Sean Murphy, a trader in New York at the primary dealer Societe Generale SA, said yesterday. “They’ll be buying mortgages or announcing some kind of mortgage-buying program. What we’re seeing is buyers of fives and sevens because the life of a mortgage averages out to that area.”

A measure of relative yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates tumbled yesterday to the lowest in five years. A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell about six basis points to 114 basis points. It was the narrowest spread since 2007.

Traders increased bets consumer prices will rise. The difference between yields on conventional 10-year U.S. notes and comparable Treasury Inflation-Protected Securities widened to 2.37 percentage points, the most in five months. The gap represents the bond market’s expectations for the average rate of inflation during the life of the debt. The figure has averaged 2.19 percentage points in 2012.

The U.S. will auction $32 billion in three-year debt on Sept. 11, $21 billion in 10-year securities the next day and $13 billion in 30-year bonds on Sept. 13.

ECB Program

Treasuries fell this week as demand for the safest assets weakened when the European Central Bank announced a program to buy euro-area government bonds to contain the area’s fiscal turmoil. ECB President Mario Draghi announced the unlimited purchase plan to regain control of interest rates in the region.

The U.S. payrolls data came two months before the presidential election. Employment and the economy are central themes in the campaign, with President Barack Obama and Republican challenger Mitt Romney each trying to convince voters they can best energize the expansion and create jobs.

“It’s the No. 1 topic going into the election,” Chris Ahrens, an interest-rate strategist in Stamford, Connecticut, at the primary dealer UBS AG, said yesterday. “The sense in the market is that the central banks are on the move and are trying to be as supportive to the economic environment as possible. The bar is low for the Fed to institute another round of asset purchases.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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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