Treasuries Fall as Stocks Rally Before Fed Manufacturing Report

Treasuries fell, trimming last week’s gain, as stocks advanced and economists said a U.S. central-bank report today will show manufacturing in the New York region expanded.

Longer-maturity debt led losses after a German report showed investor confidence climbed by a record amount this month, easing concern the European debt crisis is worsening. Treasuries also dropped after Chinese data showed growth in the world’s second-biggest economy was stronger than analysts predicted, reducing demand for safer assets.

“There’s a risk-on move and that’s weighing on Treasuries,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Economic data is pointing to a modest recovery in the U.S.,” reducing investor appetite for a haven.

The 10-year yield increased three basis points, or 0.03 percentage point, to 1.89 percent at 7:09 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 declined 1/4, or $2.50 per $1,000 face amount, to 100 31/32. The 30-year yield added three basis points to 2.94 percent.

The Stoxx Europe 600 Index gained 0.8 percent, and futures on the Standard & Poor’s 500 Index climbed 0.9 percent.

Higher Yields

“Yields will move higher through the year” for Treasuries, said Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. “The economy will hold together in the U.S. The Chinese economy is slowing, but it’s not collapsing by any stretch.”

The 10-year yield will rise to 3.1 percent by year-end, Jolly said. It set a record low of 1.67 percent on Sept. 23.

The Federal Reserve Bank of New York’s Empire State manufacturing index advanced to an eight-month high of 11 in January, based on a Bloomberg News survey of economists before the report today.

China’s GDP expanded 8.9 percent in the fourth quarter from a year earlier, the statistics bureau said, versus 8.7 percent projected by a separate Bloomberg survey. The report increased expectations Premier Wen Jiabao will favor easier monetary policy to spur growth in the world’s second-biggest economy.

The ZEW Center for European Economic Research said its index of German investor and analyst expectations surged to minus 21.6 from minus 53.8 in December. The gain of 32.2 points is the biggest since ZEW started the index in December 1991.

Fed Buying

The Fed is scheduled to buy as much as $2.75 billion of bonds due from February 2036 to November 2041 today, according to the New York branch’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs.

The three-month London interbank offered rate dropped for an eighth day today to 0.562 percent, indicating banks are becoming more willing to lend to each other. That matches the longest run of daily declines since May 31, 2011.

Demand for highly rated government bonds during Europe’s debt crisis will support Treasuries in the early part of 2012, said Hiroki Shimazu, an economist at SMBC Nikko Securities Inc. in Tokyo.

“Treasuries may rally for the next couple of weeks because people are fearful of a meltdown in the euro region,” he said.

For the first time, Wall Street’s biggest bond-trading firms hold more U.S. Treasuries than corporate securities, signaling concern the economy’s rebound will be too slow to sustain record demand for riskier assets.

Treasuries Beat Bunds

The 21 primary dealers that trade directly with the central bank held $74.7 billion of Treasuries as of Dec. 28, compared with $61.1 billion of company debt, according to Fed data.

U.S. debt due in 10 years or longer has advanced 31 percent in the past 12 months, the most among 174 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, after accounting for currency changes. Same-maturity German bunds gained 15 percent.

Greek officials are scheduled to meet creditors tomorrow to discuss the size of investor losses in a proposed debt swap. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. said in a Twitter post Jan. 15 that the nation is heading for default.

The European Financial Stability Facility, the euro area’s bailout fund, lost its top credit rating from Standard & Poor’s yesterday after France and Austria were stripped of their AAA grades on Jan. 13.

Support Level

Declines in Treasury futures may be tempered as the price approaches a level of so-called support, according to UBS AG.

“U.S. 10-years are bullish while they trade above the 130 29/32 low and as long as this remains the case the expectation is for limited corrections and further price strength,” Richard Adcock, head of fixed-income technical strategy in London, wrote in an e-mailed report today. That level represents the low of Jan. 13, he wrote.

The 10-year futures contract for March delivery dropped 4/32 to 131 10/32.

Investors held to their bearish stance on Treasuries in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker. Ried’s index on the market outlook through June fell to 44 for the seven days ended Jan. 13 from 45 the week before. A figure below 50 shows investors expect Treasuries to decline.

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