U.S. Debt Set for Weekly Loss on EU Effort to Stem Crisis

Treasuries gained for the first time in four days as concern that measures to increase lending in the euro region won’t boost economic growth, spurred demand for the safest assets.

U.S. 10-year note yields traded below 2 percent as a German report showed retail sales in Europe’s largest economy unexpectedly declined in January. The European Central Bank said overnight deposits soared to a record after its second allocation of three-year loans on Feb. 29. The Federal Reserve bought $1.97 billion in longer-term securities.

“People just don’t feel confident about going home short with the possibility of more headline risk,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “People are wondering if there’s going to be enough funding for the situation.” A short position is a bet the price of a security will drop.

The yield on the 10-year note fell five basis points, or 0.05 percentage point, to 1.98 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 gained 15/32, or $4.69 per $1,000-face amount, to 100 7/32. Yields are little changed this week.

Futures Bets

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending Feb. 28, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 22,496 contracts on the Chicago Board of Trade. Net-short positions fell by 42,789 contracts, or 66 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Volume in the Treasury market yesterday exceeded $300 billion for the second straight day amid disappointment Fed Chairman Ben S. Bernanke failed to indicate the central bank will boost economic stimulus. Volume totaled $313 billion compared with $365 billion traded the previous day through ICAP Plc, the world’s largest interdealer broker. The one-year average is $273 billion.

“We overshot yesterday and the day before,” said Larry Dyer, a U.S. interest rate strategist with HSBC Holdings Plc’s HSBC Securities unit in New York, one of 21 primary dealers that trade with the Fed. “Now we’re having a bit of a recovery.”

Yield Difference

The difference between the yield on 10-year German debt and similarly dated Treasuries widened to 18 basis points today, the most since November, as German bund yields dropped more than the U.S. benchmark yield on concern the sovereign-debt crisis is weighing on the region’s economic recovery.

Financial institutions parked 776.9 billion euros ($1.03 trillion) with the Frankfurt-based ECB, up from 475.2 billion euros a day earlier. The ECB this week lent banks 529.5 billion euros for three years in the biggest-single refinancing operation in its history.

German retail sales, adjusted for inflation and seasonal swings, fell 1.6 percent from December, the Federal Statistics Office in Wiesbaden said today. The median estimate in a Bloomberg survey of economists was for a 0.5 percent gain.

The Standard & Poor’s 500 Index lost 0.3 percent.

“I’m in the risk-off camp,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The austerity measures are still to put a bite into the growth trajectories. I don’t think this is an atmosphere where there’s going to be a lot of risk appetite.”

Haven Appeal

Investors who are betting on Treasuries say the securities still have appeal as a haven. Demand for the relative safety of U.S. debt is keeping 10-year yields within about 0.4 percentage point of the record low 1.67 percent reached Sept. 23.

The global economy faces “major downside risks” as its recovery is threatened by stresses in the euro area, the International Monetary Fund said in a report yesterday.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, was 2.24 percentage points. The decade-long average is 2.14 percentage points.

Treasuries fell yesterday as initial jobless claims in the U.S. matched a four-year low and as Bernanke failed to hint at additional economic stimulus. A government report on March 9 is forecast to show nonfarm payrolls grew by 210,000 in February, after gaining 243,000 the previous month, according to a Bloomberg News survey.

Price Swings

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed yesterday at 77.4 basis points, at almost the lowest since July 2007 and less than the five-year average of 112 basis points.

The Fed purchased securities maturing from February 2036 to May 2041 today as part of its Operation Twist program to replace shorter-term Treasuries with longer-term securities.

Government bonds in the U.S. and other developed nations may be heading into a “structural bear market” from which they may not emerge for two decades, according to Aberdeen Asset Management Plc.

Yields have fallen to historically low levels that aren’t justified by fundamentals, said Paul Griffiths, head of fixed income at Aberdeen, the biggest money manager in Scotland and which oversees $265 billion. This makes the bond markets vulnerable to a sudden reversl, especially if central banks including the Fed and the Bank of England sell their holdings of debt bought under quantitative easing stimulus programs, he said.

The 10-year Treasury yield will climb to 2.52 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

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