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Treasuries, Stocks Gain Before State of Union; U.K. Pound Drops

Spanish Finance Minister Elena Salgado
Spanish Finance Minister Elena Salgado said savings banks will be able to use existing methods set out in the savings-bank law to raise capital. Photographer: Jock Fistick/Bloomberg

Treasuries rose, pushing yields on 10- and 30-year debt down the most this year, and U.S. stocks reversed losses amid speculation President Barack Obama will propose a freeze on some spending and announce measures to bolster growth. Gold slid to a three-month low.

Thirty-year Treasury yields tumbled as much as nine basis points and 10-year yields decreased as much as 10 points, while the Standard & Poor’s 500 Index recovered from a 0.8 percent slide to close up less than 0.1 percent at 1,291.18 at 4 p.m. in New York. The pound slid against all 16 major peers after the U.K. economy unexpectedly shrank. The S&P GSCI commodities index lost 1.6 percent as oil sank to an eight-week low.

Treasuries and stocks headed higher as traders awaited Obama’s State of the Union address tonight. The president will call for a five-year freeze on non-security discretionary spending, according to a White House official who spoke on the condition of anonymity. Investors including Jeffrey Kleintop, chief market strategist at LPL Financial Corp. in Boston, said they expect tonight’s speech to be more “pro-business” and possibly contain plans to create jobs and cut corporate taxes.

“People tried to take the market lower, but the bulls did not let it happen,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $52.5 billion. “The trend for stocks is up. There are also some expectations on what the State of the Union address will be. Some people didn’t want to go short on a day like today.”

$35 Billion Note Auction

Treasuries also rose after a $35 billion auction of two-year notes attracted greater-than-average demand. The current two-year note yield slipped five basis points to 0.58 percent. The yield on the 10-year note pared its decline to eight basis points at 3.33 percent.

The securities sold in today’s auction drew a yield of 0.65 percent, compared with a forecast of 0.663 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.47, compared with an average of 3.35 at the previous 10 sales.

The S&P 500 rose for a third straight day as AT&T Inc. and Apple Inc. paced gains that sent telephone and technology shares to the biggest gains among 10 groups. Earlier losses followed earnings that disappointed investors at Johnson & Johnson and American Express Co.

Earnings Season

Johnson & Johnson fell 1.8 percent after forecasting adjusted earnings per share for the year of $4.80 to $4.90, less than the $4.98 prediction by 22 estimates in a Bloomberg survey.

American Express lost 2.2 percent as the biggest U.S. credit-card issuer by purchases reported earnings that missed estimates. Texas Instruments Inc., the largest analog chipmaker, slipped 1.9 percent after an inventory buildup raised concern orders may trail off.

Sales have topped analyst estimates at 76 percent of the S&P 500 companies which reported results since Jan. 10 and earnings-per-share exceeded projections at 72 percent of the 88 companies, according to data compiled by Bloomberg. This is the first time that companies exceeding sales projections outpaced profit surprises since the rebound in earnings which started in 2009, according to a note from Bank of America Corp. equity strategists led by David Bianco.

Earlier losses in stocks also came after S&P/Case-Shiller index of home values in 20 cities fell 1.6 percent from November the prior year, the biggest 12-month decrease since December 2009. The decline matched the median forecast of economists surveyed by Bloomberg. The Conference Board’s index of sentiment increased to 60.6 in January, topping the median economist projection of 54 in a Bloomberg News survey.

Pound Slides

The pound tumbled 1.1 percent to $1.5817, and depreciated 1.5 percent versus the euro. Short-sterling futures rose, sending the yield on the December 2011 contract down 18 basis points to 1.37 percent. The Swiss franc jumped 1.8 percent against the pound and appreciated 0.4 percent versus the euro, reversing declines of as much as 0.3 percent before the GDP report.

U.K. gross domestic product shrank 0.5 percent after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Economists had predicted 0.5 percent growth, based on the median of 33 estimates in a survey. Services, which make up 76 percent of the economy, shrank 0.5 percent, the statistics office said.

‘Loss of Momentum’

“This disappointing outcome suggests that the loss of momentum is faster than we, and the Bank of England, penciled,” Chiara Corsa, an economist at UniCredit Bank in Milan, wrote in an e-mail. “What is particularly worrying is the contraction in services activity, which has probably already started to feel the pain of the upcoming fiscal tightening.”

Spanish banks slumped after the nation’s Finance Minister Elena Salgado predicted yesterday lenders will need no more than 20 billion euros ($27 billion) of extra capital, while Sergio Gamez, a London-based analyst at Bank of America Corp., said the lenders may require even more. Bankinter SA led the selloff, losing 5.2 percent. Banco Santander SA, the nation’s largest lender, slid 3.1 percent. The Stoxx 600 Banks Index slipped 1.8 percent as 49 of 53 shares dropped.

Ericsson AB, the world’s biggest maker of wireless networks, advanced 2.5 percent after sales beat analysts’ estimates.

Spanish Bonds

The extra yield investors demand to hold 10-year Spanish bonds instead of benchmark German bunds rose 12 basis points to 221 points even as demand rose at a sale of 945 million euros of three-month Treasury bills. Investors bid for 5.48 times the securities on offer, compared with a bid-to-cover ratio of 2.14 last time the debt was sold in December, data from the Bank of Spain showed. Spain also sold 1.3 billion euros of six-month bills, with a bid-to-cover ratio of 5.11 versus 5.15 at a previous sale.

The euro climbed as much as 0.4 percent against the dollar, before reversing gains, as the European Financial Stability Facility’s 5 billion-euro bond sale to help fund Ireland’s bailout attracted orders of 43 billion euros from about 500 investors, according to two people involved in the transaction.

Gasoline, coffee, natural gas and copper lost at least 2.4 percent to lead declines in commodities. Zinc dropped for a ninth day, losing 3.5 percent in London. Oil for March delivery slid 1.9 percent to $86.19 a barrel in New York, the lowest settlement since Nov. 30.

Gold futures for February delivery fell as low as $1,321.90 an ounce, the lowest in almost three months, as demand waned for precious metals as alternative investments.

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