Treasuries Drop for First Time in 3 Days on Fed, Europe

Treasuries fell for the first time in three days as the Federal Reserve opened a meeting amid speculation it may do more to boost the economy and investors bet European leaders will make progress on their debt crisis.

U.S. 30-year bond yields rose from the lowest level in almost two weeks as a European official signaled Greece may get an easing of the economic-performance targets set as a condition for it to receive international aid. Euro-area leaders at the Group of 20 summit pledged to “take all necessary policy measures” to defend the currency union, according to Canadian Prime Minister Stephen Harper.

“There is optimism that European policy makers are getting their acts together and optimism the Fed is going to take some further action tomorrow, which is taking some of the safe-haven buying out of the Treasury market,” said Larry Milstein, managing director in New York of government trading at R.W. Pressprich & Co., a broker dealer for institutional investors. “Any selloff in rates will be limited until we get concrete answers.”

The 30-year yield climbed seven basis points, or 0.07 percentage point, to 2.73 percent at 5:10 p.m. New York time, according to Bloomberg Bond Trader data, after touching 2.64 percent earlier, the least since June 6. It reached a record low 2.51 percent on June 1. The price of the 3 percent security maturing in May 2042 tumbled 1 17/32, or $15.31 per $1,000 face amount, to 105 13/32.

The benchmark 10-year note yield increased five basis points to 1.62 percent.

Risk Appetite

Stocks rallied as investor risk appetite swelled. The Standard & Poor’s 500 Index gained 1 percent.

Treasuries returned 3.3 percent from the end of March to yesterday, according to Bank of America Merrill Lynch’s Treasury Master index, amid concern Europe’s debt crisis was worsening and U.S. growth was slowing. The S&P 500 lost 4.1 percent, after taking account of reinvested dividends.

A valuation measure showed U.S. 10-year notes remained at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.87 percent, after reaching a record of negative 0.94 percent on June 1 as investors sought refuge from Europe’s sovereign-debt crisis.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.

Volatility Slides

Volatility in the Treasuries market dropped yesterday by the most since November 2010, sliding 10.2 percent to 85.7 basis points, according to Bank of America Merrill Lynch’s MOVE index. The gauge measures price swings based on options. The one-year average is 88.2 basis points.

Trading volume increased today while remaining below average. About $214 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, compared with an average of $254 billion over the past year. Volume was $188 billion yesterday, the least since May 25.

Fed Chairman Ben S. Bernanke said on June 7 that Europe’s situation poses “significant risks” to the U.S. economy and that the Fed was prepared to take action if necessary. U.S. industrial production unexpectedly fell last month and retail sales and consumer prices declined, data showed last week.

Central-bank policy makers will issue a statement after their two-day meeting concludes tomorrow.

“There’s a slight increase in the odds of Fed action,” said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, one of the 21 primary dealers that trade with the Fed.

The Fed’s Operation Twist program, in which it’s selling $400 billion of Treasuries maturing in three years or less and buying an equal amount of bonds with a maturity of six years to 30 years to cap borrowing costs, is set to expire this month.

Fed Purchase

The Fed bought $1.72 billion of Treasuries today due from August 2022 to February 2031 as part of the program, which followed two rounds of debt purchases under quantitative easing, or QE, from 2008 through 2011.

The yield gap between 10-year notes and Treasury Inflation Protected Securities, a signal of traders’ expectations for inflation called the break-even rate, was 2.15 percentage points. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20.

Treasuries remained lower after Commerce Department data showed housing starts in the U.S. dropped 4.8 percent in May to a 708,000 annual pace from a revised 744,000 rate in April that was the highest since October 2008. The median forecast of 77 economists surveyed by Bloomberg News called for a 722,000 pace.

Spanish Bonds

Spanish 10-year bond yields declined as much as 13 basis points to 7.03 percent, after climbing yesterday to a euro-era record of 7.29 percent. The nation met its maximum target at a bill auction. Spain asked on June 9 for aid to rescue its lenders, becoming the fourth euro member to seek a bailout since the debt crisis began.

G-20 leaders, in a statement to be issued later today in Los Cabos, Mexico, back Europe’s plans to move toward a more integrated banking industry, Canada’s Harper told reporters.

A first step to Greece winning a revision of its bailout terms will be when the nation’s still to-be-formed government requests modifications to the 240 billion-euro ($303 billion) rescue programs, leading to a revision of economic-performance targets sometime before September, a European official told reporters in Brussels earlier today.

Europe floated the relief as the victor in the June 17 Greek election, Antonis Samaras of the New Democracy party, accelerated preparations for a coalition government.

Net Neutral

Treasuries investors were net neutral on the securities last week for the first time in June after raising bets on gains to a level matching their wagers on decreases, according to a survey by the primary dealer JPMorgan Chase & Co.

The proportion of net shorts, or bets the securities would fall compared with those on an advance, was trimmed to zero in the week ended yesterday, from six percentage points the previous week. The level of outright shorts dropped from 19 percent to 17 percent, equaling the level of outright longs, which rose from 13 percent a week earlier. A long position is a bet that an asset will increase in value.

“Investors remain very neutral, but the shift from last week is an increase in longs,” said Srini Ramaswamy, a strategist in New York at JPMorgan Chase. “It’s not surprising, given the macro uncertainty. Treasury yields remain a reflection of European concerns and policy there.”

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