Treasuries Fall for 4th Day Amid Optimism on Europe Debt Crisis

Treasury 10-year notes fell for a fourth day as speculation European Union finance ministers will make progress to resolve the region’s sovereign-debt crisis reduced demand for the safest securities.

Longer-maturity debt led losses after French Finance Minister Francois Baroin said in Paris that negotiations between Greece and its private creditors were making “tangible progress.” Goldman Sachs Group Inc. and JPMorgan, primary dealers that trade directly with the Federal Reserve, recommended selling Treasuries amid better U.S. Data and improving sentiment in Europe.

“The wall of worry in Europe on sovereign financing has been stemmed some and the domestic economic data has been better, which is weighing on Treasuries,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Company in New York. “The market is still in a wait-and-see mode as the fundamental problems in Europe have not been adequately addressed. But, for now, there is some calming.”

The 10-year yield rose three basis points, or 0.03 percentage point, 2.05 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 dropped 7/32, or $2.19 per $1,000 face amount, to 99 17/32. The yield fell earlier as much as three basis points.

The 30-year bond yield climbed three basis points to 3.13 percent, after falling three basis points to 3.07 percent. The two-year yield fell one basis point to 0.23 percent before the U.S. auctions similar-maturity securities tomorrow.

The difference between two- and 10-year yields was 1.82 percentage points today, the most since Dec. 9.

‘Financial Firewalls’

EU finance ministers met to discuss new budget rules, a plan to protect indebted states and the Greek debt swap. Germany floated the idea of combining Europe’s two rescue funds, in a concession to bolster the fight against the fiscal crisis as Greece bargained with bondholders over debt relief.

“It’s essential that we will be able to reinforce our financial firewalls,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters before the meeting in Brussels.

The Fed starts a two-day policy meeting tomorrow after which it will provide forecasts for the benchmark interest rate for the first time.

The Federal Open Market Committee left its target for overnight loans between banks in a range of zero to 0.25 percent last month and reiterated that economic conditions may warrant “exceptionally low” rates “at least” through mid-2013.

‘Caring Less’

“Treasury market investors seem to be caring less and less about Europe’s problems given the lack of negative headlines that the market had grown accustomed to, and this is weighing on Treasuries,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York. “There is clearly a bias toward the upside in yields, though any selloff will be moderate given the uncertainty around the Federal Reserve meeting this week.”

The Fed is seeking to keep longer-term borrowing costs capped by selling $400 billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders have dubbed Operation Twist.

The central bank bought $1.746 billion of Treasuries due from 2022 to 2031 today as part of the program.

Goldman Sachs recommended selling Treasury 10-year futures expiring in March, citing an “improvement in industrial activity.”

‘Mildly Bearish’

Investors should bet the 10-year note future drops to 126 and exit the trade if the price increases to 132, Francesco Garzarelli, co-head of fixed-income strategy in London, wrote in an e-mailed message today. The yield on the benchmark 10-year Treasury note may advance to 2.25 percent to 2.50 percent, Garzarelli wrote.

JPMorgan said it turned “mildly bearish” on Treasuries as funding conditions in Europe improve. The firm raised its first-quarter estimate for 10-year note yields to 2.25 percent, according to a research report dated Jan. 20.

The Treasury will sell $99 billion of notes this week, starting with $35 billion of two-year securities tomorrow, then $35 billion in five-year debt the following day and $29 billion of seven-year notes on Jan. 26.

The two-year notes yielded 0.25 percent in pre-auction trading, compared with 0.24 percent at the previous sale Dec. 19, the lowest since August. Investors bid for 3.45 times the amount for sale last month, down from 4.07 times in November.

Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Barack Obama was George W. Bush in 2004.

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