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Treasuries Halt Four-Day Gain as ECB Debt Buys Reduce Concern

Treasuries fell, snapping a four-day advance, as Italian and Spanish bonds rose on purchases by the European Central Bank to bolster markets as officials work to address the sovereign-debt crisis.

European officials may start talks with the International Monetary Fund on a mechanism for the ECB to lend to the International Monetary Fund for sovereign bailouts in the region, Dow Jones Newswires reported. The Treasury is scheduled to sell $99 billion of notes next week and the Federal Reserve is offering as much as $17.5 billion of Treasuries maturing in less than three years at two sales.

“The market is waiting for the next shoe to drop to give us direction one way or the other,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “We are ending the week near the key levels of 2 percent on 10-year notes and 3 percent on the long bond. The market is attracted to the round numbers given the uncertainty in the market.”

Treasury 10-year yields climbed five basis points, or 0.05 percentage point, to 2.01 percent at 5:14 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 fell 14/32, or $4.38 per $1,000 face amount, to 99 29/32. The yield declined five basis points this week.

Thirty-year bond yields rose one basis point today to 2.99 percent.

Futures Bets

Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures in the week ending Nov. 15, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 99,542 contracts on the Chicago Board of Trade. Net-short positions rose by 3,367 contracts, or 4 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

The Fed bought $2.5 billion of Treasuries due from 2036 to 2041 today as part of a plan announced in September to replace $400 billion in shorter maturities with longer-term debt to cap borrowing costs.

Treasuries have returned 9.2 percent this year as of yesterday, according to Bank of America Merrill Lynch data. German bunds advanced 8.4 percent and Japanese government securities handed investors a 2.1 percent gain.

Spanish Bonds

U.S. government bonds gained for the week as borrowing costs jumped at Spanish and French bond sales yesterday and a Franco-German dispute over the ECB’s role in ending the crisis added to concern that Europe’s most indebted nations won’t meet their obligations. The crisis has driven up bond yields outside Germany to euro-era records, helped bring down Greek and Italian governments and threatened the survival of the euro.

“Ten-year Treasury yields have struggled to remain below 2 percent recently because data has lessened the chances of a U.S. recession,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “But European tensions are giving Treasuries a firm underpinning.”

ECB President Mario Draghi today pressed governments to act on promises to end the sovereign debt crisis, indicating he’s not prepared to come to the rescue with large-scale bond purchases.

Italy Banks

Italy’s five biggest banks, including Intesa SanPaolo SpA, may need to raise a combined 6.1 billion euros ($8.3 billion) of additional capital as the Italian government bonds they own deteriorate in value.

Two-year Italian debt, which the banks valued at 97 cents on the euro or better on Sept. 30, trades at about 92.7 cents. That suggests Intesa, UniCredit SpA, Unione di Banche Italiani SCPA, Banco Popolare and Monte Dei Paschi di Siena SpA need more capital, today’s Bloomberg Risk newsletter reports. Spokespeople at all five banks declined to comment on their capital needs.

“Unless an actual deal takes place or something seriously negative occurs over in Europe, it’s going to be difficult for us to break out of this range,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It’s been volatile but for the whole month we’ve been stuck between” 1.93 percent and 2.15 percent.

Economic Indicator

The index of U.S. leading indicators climbed more than forecast in October, signaling the world’s largest economy will keep growing in early 2012.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York-based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Reports yesterday signaled improvement in the weakest areas of the U.S. economy, with claims for unemployment benefits dropping to the lowest level in seven months and housing starts exceeding forecasts.

Economists at JPMorgan Chase & Co. in New York now see gross domestic product rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. Macroeconomic Advisers in St. Louis increased its forecast to 3.2 percent from 2.9 percent at the start of November, while New York-based Morgan Stanley & Co. boosted its outlook to 3.5 percent from 3 percent.

The 10-year yield will advance to 2.43 percent by the middle of 2012, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. An investor who bought today would lose 2.7 percent if the forecast is correct, data compiled by Bloomberg show.

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