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Treasuries Decline With ISM Index Forecast to Show Growth

Treasuries fell after an index of U.S. service industries grew at its fastest in a year, renewing bets the economic recovery is taking hold, and as Greece said it expected private creditors to accept its debt-swap terms.

Ten-year note yields earlier touched the lowest level since Feb. 29 after China reduced its economic growth target. The Federal Reserve, which meets March 13 on policy, sold $1.33 billion in inflation-linked U.S. debt.

“It’s optimism that the domestic economic picture is improving and that we may see higher rates going forward,” said Larry Milstein, managing director in New York of government- and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The market is anticipating that private creditors will accept the terms of the deal” in Europe.

The U.S. 10-year note yield rose four basis points, or 0.04 percentage point, to 2.01 percent at 5:07 p.m. New York time, according to Bloomberg Bond Trader prices. It fell earlier to 1.96 percent after dropping five basis points on March 2 to 1.97 percent. The price of the 2 percent security due in February 2022 declined 10/32, or $3.13 per $1,000 face amount, to 99 29/32. The yield has traded this year between 2.09 percent and 1.79 percent.

Yields on 30-year Treasury bonds increased five basis points to 3.15 percent.

Yield Curve

The yield gap between 2- and 30-year U.S. securities, called the yield curve, was at 2.86 percentage points, compared with a one-year average of 3.28 percentage points. A flatter curve generally signals a more bearish outlook on the economy.

Credit-default swaps on U.S. government debt rose 1.3 basis points to 36 basis points as of 2 p.m. in New York, according to the data provider CMA. That’s down from the peak of 100 basis points during the height of the financial crisis in 2009 and below 77.7 basis points for higher-rated German bunds.

The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. At today’s rate on U.S. debt, it would cost the equivalent of $36,000 a year to protect $10 million of debt against default for five years.

Treasuries declined after the Institute for Supply Management’s index of non-manufacturing industries, which account for almost 90 percent of the U.S. economy, rose to 57.3 from 56.8 a month earlier. The Tempe, Arizona-based group’s measure was projected to fall to 56, according to a Bloomberg News survey. Readings above 50 signal growth.

The Labor Department’s non-farm payrolls report on March 9 will show employers added more than 200,000 jobs for a third month in February, according to another Bloomberg survey.

Labor Market ‘Crucial’

“Last month’s report encouraged people who were bullish on the economy,” David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, said of the Feb. 3 payrolls data. “The labor market is crucial. If it strengthens, then there’s a much better chance for the growth we are seeing to be self-sustaining.”

A measure of traders’ expectations for inflation that’s tracked by the Fed was at 2.47 percent. It touched a 2012 high of 2.6 percent last month and a low of 2.42 percent. The five-year, five-year forward break-even rate, which projects annualized price increases over a five-year period starting in 2017, is below its 2.76 percent average over the past decade.

The difference between yields on 10-year notes and comparable Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt, was 2.22 percentage points, the lowest in more than two weeks. The five-year average is 2.03 percentage points.

Fed Sale

The Fed sold TIPS today due from July 2012 to January 2015, according to the Fed Bank of New York website. The central bank is in the process of selling $400 billion of shorter-maturity Treasuries in its holdings and buying the same amount of longer-term debt to cap long-term borrowing costs under a program scheduled to end in June.

It’s difficult “to see the 10-year note back up to 2.15 percent or 2.2 percent until we move closer to June and the Fed stops buying,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 firms that trade Treasuries with the Fed.

The Fed’s Open Market Committee, which sets interest-rate policy, meets next week amid investor speculation that improvements in economic data have reduced the likelihood it will initiate a third round of asset purchases under quantitative easing. It has held the key U.S. interest rate at zero to 0.25 percent since December 2008.

Fisher Comments

Dallas Fed President Richard Fisher said he opposes additional central-bank purchases of securities and in a speech in Dallas urged Wall Street to get ready to become less dependent on monetary easing.

Morgan Stanley said more easing is likely. Slack in the economy, inflation below the Fed’s medium-term projection and policy makers’ belief the economy has been operating at a sub-par pace will spur additional measures by the central bank before the end of June, Vincent Reinhart, Morgan Stanley’s chief U.S. economist, said today in a note to clients.

Greece expects bondholders to accept a one-time offer to write off about 100 billion euros ($140 billion) of Greek debt and is ready to force them to participate if necessary, Finance Minister Evangelos Venizelos said. The deadline is March 8.

Chinese Premier Wen Jiabao pared the nation’s economic growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal leaders are determined to cut reliance on exports and capital spending in favor of consumption.

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