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Treasuries Snap Gain on Speculation Production, Payrolls Grew

Treasuries snapped a three-day gain before industry reports that economists said will show U.S. manufacturing expanded for a 16th month and companies added the most jobs since the recession began in December 2007.

The Federal Reserve is scheduled to buy $7 billion to $9 billion of notes maturing from 2016 to 2017 today as part of its plan to spur growth, according to its website. European debt concerns that spurred demand for the relative safety of U.S. bonds may fade soon, according to ICAP Australia Ltd., a unit of the world’s largest interdealer broker.

“Investing in Treasuries now is a risk,” said Tsutomu Komiya, who handles U.S. debt in Tokyo for Daiwa Asset Management Co., which oversees the equivalent of $102.9 billion and is part of Japan’s second-biggest brokerage. “The U.S. economy is gradually picking up. That will continue in 2011.”

The benchmark 10-year yield was little changed at 2.80 percent as of 6:49 a.m. in London, according to data compiled by Bloomberg. The 2.625 percent security due in November 2020 traded at a price of 98 1/2. The yield will rise to 2.90 percent by year-end, Komiya said.

Ten-year rates will advance to 3.23 percent by the close of 2011, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Investors who bought today would lose about 0.2 percent after accounting for interest payments, data compiled by Bloomberg show.

Manufacturing Expands

The Institute for Supply Management’s factory index will be 56.5 in November versus 56.9 in October, based on the median estimate of economists surveyed by Bloomberg News. Figures greater than 50 signal growth. Dow Chemical Co., the world’s second-biggest chemical company, said yesterday that fourth-quarter sales are matching those in the preceding three months, led by demand for materials used in electronics.

ADP Employer Services will say employment rose by 70,000 in November, a separate Bloomberg survey showed. The Labor Department will report on Dec. 3 that employers added jobs for a second month, economists said.

Treasuries rose yesterday on speculation Ireland’s funding crisis will spread to Portugal and Spain.

Ireland on Nov. 28 became the second country to tap European assistance, following Greece. The Irish rescue package is worth 85 billion euros ($110.8 billion).

“Investors are worried that there is more to come,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients.

Default Protection

The cost of insuring Ireland’s debt using credit-default swaps rose to a record 6.04 percentage points yesterday, according to CMA prices. Swaps covering Italy, Spain, and Portugal also climbed to the most ever.

The contracts protect debt against default, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. They pay the buyer face value in exchange for the securities if a borrower fails to meet its debt agreements.

Standard & Poor’s said yesterday it may cut Portugal’s credit ratings on concern the government has made little progress on boosting economic growth.

Demand for safety is showing up in the widening two-year interest-rate-swap spread. The gap expanded to 31 basis points, the most in four months.

In this transaction, investors exchange fixed and floating interest rates. The spread is the difference between the fixed rate and the yield on similar-maturity Treasuries. Because the figure compares a bank rate with a government yield, it is used as a gauge of risk appetite.

Libor Rises

Banks are charging more to lend to each other. The three-month London interbank offered rate for dollars rose to 0.30 percent yesterday, the most since August.

Pacific Investment Management Co., which runs the world’s biggest bond fund, said today that debt is attractive.

“In a low growth environment, global bonds are a compelling investment option,” according to a press release from Pimco, which is based in Newport Beach, California.

U.S. government securities handed investors a 0.7 percent loss last month, the most since March based on Bank of America Merrill Lynch indexes, as the Fed embarked on a plan to pump $600 billion into the banking system.

Europe’s debt concerns will fade soon, according to Adam Carr, a senior economist at ICAP in Sydney.

“This issue will die down,” Carr wrote to clients today. “Things will fizzle out. The U.S. economy is doin’ just fine.”

Demand for safety helped pull 10-year yields down 16 basis points from their highest level in November.

“It is interesting how little help a burgeoning sovereign debt crisis lent to the rates markets,” analysts including George Goncalves at Nomura Holdings Inc. in New York, wrote in a research note yesterday. “This only added more evidence to our assertion that the rates market may already be fully priced,” said Nomura, which is one of the 18 primary dealers that are required to bid at the government debt sales.

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