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Treasury Market Volatility at Low Since June Amid Europe Concern

Price swings in the Treasury market are at the lowest level since June with investors reluctant to sell U.S. debt amid concern European leaders will be unable to contain the region’s sovereign-debt crisis.

Bonds fell for the first time in three days as Greece and its creditors may have a deal by the end of the week, according to a Greek finance ministry official. The Merrill Option Volatility Estimate, or MOVE, index fell to 75.6 basis points yesterday, the lowest since June 7. In May it touched 71.5, the least since the financial crisis began. A report showed total foreign holdings of Treasuries rose 1.7 percent to a record $4.75 trillion in November.

“The economic news we’ve seen of late should be negative for Treasuries, but we’ve been stuck with yields at these levels, which makes investor optimism hard to come by,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “Given the economic uncertainty, it really would take an awful lot of positive news to generate any significant selling given the lack of momentum in Europe.”

Thirty-year bond yields rose six basis points, or 0.06 percentage point, to 2.96 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. Ten-year yields increased four basis points to 1.90 percent. The yield fell to 1.80 percent on Dec. 19, the least since Oct. 4. The two-year note yield rose one basis point to 0.23 percent. That compares with a record 0.143 percent Sept. 20.

‘Closer’ to Deal

“Treasuries are coming off as there is talk about getting closer to a deal with regards to Greek debt restructuring,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “As stocks rise, the flight-to-quality bid is less aggressive. There is a thought that maybe Europe can take care of its own problem,”

U.S. debt fluctuated earlier as the International Monetary Fund proposed raising its lending capacity by $500 billion to insulate the global economy against any worsening of Europe’s debt crisis. Global demand for U.S. financial assets rose more than forecast in November, boosted by investors seeking shelter from the European debt crisis, the Treasury Department said in Washington.

Fewer Opportunities

The reduced volatility makes it “harder to make money” as traders have fewer opportunities to exploit movements in prices, said Larry Milstein, managing director in New York of government trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

Treasury market volumes remain below average. About $187 billion of Treasuries changed hands yesterday through ICAP Plc, the world’s largest interdealer broker, below the one-year average of $281 billion and the five-year average of $270 billion.

“We haven’t had any hints of inflation in the United States in a couple months,” said Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida. “The U.S. will be significantly affected by the recession in Europe -- which is already on the way -- and consequently producer and consumer prices in the U.S. will be noticeably less, either neutral or slightly deflationary at least, over the next quarter or possibly two quarters.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.06 percentage points, up from 2.03 percentage points yesterday. The average over the past decade is 2.13 percentage points.

Producer Prices

The producer price index fell 0.1 percent, the second decrease in the past three months, Labor Department figures showed today in Washington. A survey of 74 economists projected a 0.1 percent gain, according to the median estimate in a Bloomberg News survey. The core measure excluding volatile food and energy rose 0.3 percent as the cost of light trucks climbed.

Consumer prices rose 0.1 percent last month after being unchanged in November, according to a separate survey before the data’s release tomorrow. The U.S. jobless rate has been more than 8 percent for almost three years.

Output at factories, mines and utilities rose 0.4 percent after a revised 0.3 percent decline in November, figures from the Federal Reserve showed today in Washington. Economists forecast a 0.5 percent rise for December, according to the median estimate in a Bloomberg News survey. Factory production, which makes up about 75 percent of total output, climbed by the most in a year.

The IMF is proposing a $500 billion expansion of its lending resources to safeguard the global economy against any worsening of Europe’s debt crisis, according to an official at a Group of 20 nation.

‘Bleak Outlook’

“The rates market is still pricing in a bleak outlook with regards to the European crisis,” said Eric Van Nostrand, a New York-based interest-rate strategist at Credit Suisse Group AG, one of the 21 primary dealers that trade debt with the Fed. “The supply of safe assets in recent quarters has drifted lower, which has caused a supply squeeze, which has given a bid to Treasuries. A lot of the former safe assets are no longer safe.”

The Washington-based lender is pushing China, Brazil, Russia, India, Japan and oil-exporting nations to be the top contributors, according to the official, who spoke on condition of anonymity because the talks are private. The fund wants the agreement struck at the Feb. 25-26 meeting of G-20 finance ministers and central bankers in Mexico City, the official said.

‘Relentless’ Buying

Standard & Poor’s on Jan. 13 cut the debt grades of several euro-area nations including France, Italy, Portugal and Spain, while affirming Germany’s AAA ranking.

Net buying of long-term U.S. equities, notes and bonds totaled $59.8 billion compared with net purchases of $8.3 billion in October, the Treasury said today. Including short-term securities foreigners bought a net $48.6 billion compared with net selling of $39.6 billion the previous month.

“The buying of Treasuries has been fairly relentless,” said Anthony Cronin, a trader in New York at Societe Generale, a primary dealer. “People are still concerned about Europe even though some of those financial markets are trading better. There is so much cash out there and it’s dribbling and drabbing its way back into the Treasury market.”

China, the largest foreign lender to the U.S., decreased its holdings of longer-term notes and bonds by 0.1 percent or $1.2 billion to $1.13 trillion, while also shrinking its position in shorter-term bills by $300 million to $2.3 billion. Its total holdings fell $1.5 billion, or 0.1 percent, to $1.13 trillion, the lowest since July 2010.

Target Rate

The Fed has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.

The Fed bought $4.646 billion of securities as part of a program to cap borrowing costs. The central bank sold as much as $8.74 billion of debt due from 2013 to 2014, according to the New York Fed’s website.

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