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Treasuries Fall Amid Speculation on Progress in Europe

Treasuries fell, extending a weekly loss, as speculation European leaders will make progress on curbing their sovereign-debt crisis damped demand for the perceived safety of U.S. government securities.

Ten-year notes rose the most in two days after the European Central Bank loosened collateral rules to ease access to its funds. Leaders of Germany, France, Italy and Spain agreed at a meeting in Rome to cooperate on a growth plan for the euro bloc before a June 28-29 European Union summit.

“There have been hints of positive news out of Europe, and that little bit of hope is taking some of the steam out of the Treasury market,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets. “Still, there is a pretty large safety premium still built in Treasuries, as there are a lot of questions as far as domestic and global growth is concerned.”

Ten-year yields climbed six basis points, or 0.06 percentage point, to 1.68 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The 1.75 percent notes due May 2022 fell 17/2, or $5.31 per $1,000 face amount, to 100 21/32. The yield increased 10 basis points on the week.

Thirty-year bond yields added eight basis points today and on the week to close at 2.76 percent.

The yield difference between 10- and 30-year Treasuries was 108 basis points, compared with 111 basis points a week ago. The spread was 122 basis points on Feb. 3, the widest this year.

Stocks gained, with the Standard & Poor’s 500 Index rising 0.7 percent today.

Less Expensive

A valuation measure showed U.S. 10-year notes becoming less expensive. The term premium, a model created by economists at the Federal Reserve, was negative 0.81 percent after reaching negative 0.94 percent on June 1, the costliest level ever, as investors sought refuge from Europe’s turmoil. 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.

Treasuries extended losses after the ECB said it will relax some rules on the collateral banks can offer in exchange for central-bank funds. The Governing Council will lower rating thresholds and amend eligibility requirements for some asset-backed securities, the Frankfurt-based central bank said in an e-mailed statement.

Growth Plan

German, Italian, French and Spanish leaders agreed to cooperate on a growth plan of as much as 130 billion euros ($163 billion) for the 17-nation currency bloc, about 1 percent of its economic output. They spoke to reporters after meeting in Rome. No specifics about the plan or its financing were offered.

German Chancellor Angela Merkel said growth and employment must become the focus of European leaders and called for a closer political union.

“There are positive signs coming from the euro zone that are weighing on Treasuries, and policy makers are beginning to make some good steps,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “Still, there is a lot of uncertainty, and the Fed’s extension of Operation Twist is helping to cap any selloff. The market is settling in around these levels, as we will be here for a while.”

The Fed on June 20 extended through year-end its program to sell shorter-term securities and buy the same amount of longer-term debt to lower borrowing costs, an effort traders call Operation Twist. The $400 billion plan was scheduled to end this month. The Fed expanded it by $267 billion.

Fed Purchase

The central bank purchased $1.8 billion of Treasuries today due from February 2036 to May 2042 under the program.

Treasuries rose yesterday as data showed more Americans than forecast filed claims for jobless benefits, manufacturing in the Philadelphia region shrank and sales of existing homes fell. A Chinese output gauge also indicated contraction, and euro-area manufacturing shrank.

U.S. government debt returned 3.2 percent from the end of March through yesterday, according to the Bank of America Merrill Lynch Treasury Master index, amid concern Europe’s financial woes were worsening and U.S. growth was slowing. The 10-year note yield reached a record low of 1.44 percent on June 1 before climbing on bets policy makers and central banks would act to stem the crisis. The S&P 500 lost 5.4 percent this quarter as of yesterday.

Continuing Story

“Europe is an ongoing story, and the markets will find something good and bad about it every day for the next few years,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “You will likely see a fair amount of volatility, but not a lot of price/yield movement from either Treasuries or equities until the U.S. elections or a major break up or down in Europe.”

Volatility in the Treasuries market fell to 75.1 basis points today marking five straight days of declines, according to Bank of America Merrill Lynch’s MOVE index. It reached a 2012 high of 95.4 basis points June 15 as investors speculated the Fed would extend a stimulus program, and touched a low for the year at 56.7 on May 7. The index measures price swings based on options.

Trading volume dropped for a second day. About $181 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, versus $317 billion on June 20. The average volume over the past year is about $255 billion.

The Treasury will auction $99 billion of notes next week: $35 billion of two-year debt on June 26, the same amount of five-year securities the next day and $29 billion of seven-year notes on June 28.

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