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Treasuries Hold 3-Day Drop on EFSF Expansion, Economic Outlook

Treasuries held a three-day loss after European leaders agreed to expand the capacity of a rescue fund for indebted nations, sapping demand for safer assets.

The difference between yields on 10-year Treasuries and inflation-indexed securities, a gauge of trader expectations for consumer prices over the life of the debt, increased six basis points this week to 2 percentage points. Private reports today may show improving U.S. job growth and home sales.

“The markets are moving away a little from the risk-averse mood fueled by the European situation, and that’s been leading to some selling of Treasuries,” said Ayako Sera, a market strategist in Tokyo at Sumitomo Trust & Banking Co., which manages the equivalent of $298 billion. “There’s room for yields to rise because I think the U.S. economy isn’t so bad.”

Benchmark U.S. 10-year yields were little changed at 1.99 percent as of 6:41 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 changed hands at 100 3/32. The yield has decreased 12 basis points since Oct. 31.

Sumitomo’s Sera said 10-year rates may advance to the mid-2 percent level, without giving a specific timeframe.

EFSF Firepower

Euro-area ministers meeting in Brussels yesterday agreed to a plan to guarantee as much as 30 percent of new bond issues from troubled governments and to develop investment vehicles that would boost the European Financial Stability Facility’s ability to intervene in primary and secondary bond markets.

The fund has a current lending capacity of 440 billion euros ($586 billion). “Without knowing the exact amounts needed, the EFSF should be able to leverage” its own resources of up to 250 billion euros, according to a statement from the organization.

Treasuries fluctuated throughout November in response to European efforts to convince investors that nations in the region will be able to pay their debts.

Demand for the relative safety of U.S. securities resulted in a 1.1 percent gain this month as of yesterday, based on Bank of America Merrill Lynch data. German bunds fell 0.9 percent and Japanese bonds were little changed, the indexes show. The MSCI All Country World Index of equities has lost 6.8 percent in November.

Best Performer

Treasuries due in 10 years and more have returned 27 percent in 2011, the most among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, after accounting for changes in currency rates.

“We still have a long, long way to go to settle the European debt problem,” said Tsutomu Komiya, one of the bond investors at Daiwa Asset Management Co. in Tokyo, which oversees the equivalent of $118.7 billion and is a unit of Japan’s second-biggest brokerage. “It will help keep yields down.”

Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. had their long-term credit grades reduced to A-from A after Standard & Poor’s revised criteria for dozens of the world’s biggest lenders.

Investors should recognize that Europe’s problems are global, and U.S. bonds will be among the beneficiaries, according to Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.

“In the bond market space, the favorite strategy will be to locate the cleanest dirty shirts -- the United States, Canada, United Kingdom and Australia,” Gross, wrote in his monthly outlook on Pimco’s website yesterday. “Bond investors should also consider high as opposed to lower quality corporate,” wrote Gross, who is based in Newport Beach, California,

Fed Sales

Japan’s 10-year yield was unchanged at 1.065 percent, matching the highest level in almost three months.

The Federal Reserve is scheduled to sell as much as $8.75 billion of Treasuries due 2013 today as part of a plan announced in September to replace $400 billion in shorter maturities with longer-term debt to cap borrowing costs.

Signs of improvement in the U.S. economy also weighed on demand for Treasuries. U.S. jobs increased by 130,000 this month after rising by 110,000 in October, according to the median estimate of economists surveyed by Bloomberg News before the data by ADP Employer Services today. A separate report by the National Association of Realtors may indicate pending home sales increased 2 percent in October after falling 4.6 percent the prior month.

That would follow data yesterday showing consumer confidence improved by more than forecast in November as Americans turned less pessimistic on jobs and wages. The Conference Board said its index increased to 56 this month from a revised 40.9 reading in October, the biggest monthly gain since April 2003.

-- Editors: Garfield Reynolds, Jonathan Annells.

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