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Treasuries Advance on European Debt Crisis, China GDP

Treasuries rose, pushing 10-year yields below 2 percent, on speculation Europe’s sovereign-debt crisis is worsening as Spanish banks’ borrowings from the European Central Bank jumped last month.

U.S. 10-year notes posted a fourth week of gains, the longest stretch of weekly increases since August. Treasuries were supported after a report showed China’s gross domestic product rose less than economists forecast, encouraging speculation global growth is slowing. The Federal Reserve purchased $1.8 billion of securities as part of a program to boost the U.S. economy.

“It’s going to be a long process before Europe is out of the woods,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “It’s a risk-off day. Europe has an effect on our markets as well, and it will have an effect on economic data and how our economy grows.”

Yields on 10-year notes decreased seven basis points, or 0.07 percentage point, to 1.98 percent at 5:01 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 advanced 19/32, or $5.94 per $1,000 face amount, to 100 5/32.

Yields on 30-year bonds decreased eight basis points to 3.13 percent. The Standard & Poor’s 500 dropped 1.3 percent.

Yield Decline

The benchmark 10-year yields have dropped seven basis points this week. The four weeks of price gains is the longest winning streak since the week ended Aug. 19, according to data compiled by Bloomberg. Yields have declined 30 basis points since the week ended March 16.

Treasuries remained higher as the cost of living in the U.S. increased 0.3 percent in March, matching forecasts, according to a report from the Labor Department.

The so-called core measure of CPI, which excludes food and energy, rose 0.2 percent, the Labor Department said. The cost of goods and services excluding food and energy in the U.S. rose 2.3 percent in March from a year earlier. It rose 2.2 percent for the 12 months ended in February.

Wholesale prices in the U.S. excluding food and fuel rose more than forecast in March, Labor Department figures showed yesterday in Washington.

Inflation Measure

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt known as the break-even rate, was 2.27 percentage points. The average for the past decade is 2.14 percentage points.

“Our economists expect a path of moderation in CPI growth over the coming months,” Eric Van Nostrand, interest rate strategist at primary dealer Credit Suisse Group AG, wrote in a note to clients. Van Nostrand recommended that investors should short 10-year TIPS break-evens as they are 30 basis points rich compared with the firm’s model. A short is a bet the price of a security will decline.

A measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.6 percent, below its 2.76 percent average during the past decade. It touched 2.78 percent on March 19, the highest in 2012.

It reached 3.23 percent in August, the highest since December 2010. The five-year, five-year forward break-even rate projects annual price increases over a five-year period beginning in 2017.

Real Yields

Treasury 10-year notes pay negative 0.7 percentage points, after subtracting consumer price increases. The so-called real yields in the U.S. averaged 2.6 percentage points over the past 20 years. It hit a high of 5.9 percentage points in August 2009.

The U.S. will sell $16 billion of five-year Treasury Inflation Protected Securities on April 19. The U.S. sold $12 billion of the securities at the previous sale Dec. 15.

The Treasury auctioned $66 billion in notes and bonds this week, including $13 billion in 30-year bonds yesterday, $21 billion in 10-year notes the previous day and $32 billion in three-year notes on April 10. This week’s sales will raise $23.1 billion of new cash as maturing securities held by the public total $42.9 billion.

Thirty-year bonds, sensitive to inflation because of their long maturity, returned 2.7 percent this month as of yesterday, compared with a 0.9 percent gain for the broad market, according to Bank of America Merrill Lynch indexes.

Value Trade

Valuation measures show U.S. government debt is approaching the most expensive levels in almost five weeks. The term premium, a model created by economists at the Fed, reached negative 0.64 percent today after touching negative 0.65 percent on April 10. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The Fed purchased Treasuries due from February 2036 to August 2041 today, according to the New York Fed’s website. The central bank is replacing $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.

Investors optimistic enough to predict that the Fed won’t buy more debt to support the economy decreased this month amid slower job growth, according to a Citigroup Inc. survey.

Almost 45 percent of respondents said they didn’t expect the Fed to carry out a third round of quantitative easing, known as QE3, according to the April survey by the bank’s Citigroup Global Markets unit. That was down from about 60 percent of respondents who expected no QE3 in a March survey. The recent results were published yesterday in a research note.

Fed View

Bill Gross, Jeffrey Gundlach and Dan Fuss, whose companies collectively oversee about $1.5 trillion, expect the Fed to conduct a third round of bond purchases as signs of strength in the U.S. economy fade and Europe’s debt crisis returns. The managers at Pacific Investment Management Co. and DoubleLine Capital LP favor mortgage debt, while Loomis Sayles & Co. buys corporate bonds.

China’s gross domestic product expanded 8.1 percent in the first quarter from a year earlier, the lowest since 2009, the National Bureau of Statistics said today. The median estimate in a Bloomberg News survey was for 8.4 percent growth. Some strategists say slowing growth will increase pressure on central banks around the world to do more to fuel the expansion.

“We’ve had somewhat friendly data, in the form of China GDP,” said David Ader, head of U.S. government bond strategy at CRT Capital Group in Stamford, Connecticut.

Spain’s Debt

The cost of insuring against a Spanish default jumped to a record as Prime Minister Mariano Rajoy struggled to prevent the nation from becoming the fourth euro-region member to need a bailout.

Credit-default swaps on Spain rose 17 basis points to 498 as of 4 p.m. in London, surpassing the all-time high closing price of 493, according to CMA. The contracts are up from 431 at the start of the month and 380 at the end of 2011, signaling deterioration in investor perceptions of credit quality.

The yield on Spain’s 10-year bond rose to 6 percent, close to the four month high of 6.02 percent reached April 11. Spanish banks’ borrowings from the ECB jumped by almost 50 percent in March, reaching the most on record, as lenders tap emergency loans and channel some of it into sovereign debt purchases.

“We’re back to looking at Europe as our main driver,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We’re back to that game plan. The Spanish banks borrowed more from the ECB than was expected.”

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