Treasuries Fall as Speculation Europe to Act Crimps Haven Demand

Treasury 10-year note yields rose the most in four months on speculation European leaders were taking steps to resolve the region’s sovereign-debt crisis, damping demand for the safest assets.

The benchmark 10-year yield rose to the highest in three weeks after a report that the heads of the European Central Bank and the Bundesbank will hold talks on new rescue measures as the leaders of Germany and France pledged to do “everything” necessary to save the euro. Treasuries trading volume was the highest this month as the U.S. economy expanded faster than forecast in the second quarter, Commerce Department data showed. The Federal Open Market Committee meets for two days starting July 31.

“There is a little bit more optimism about a plan coming together from European policy makers, which is giving the risk-off rally a bit of a breather,” said Michael Cloherty, head of U.S. interest-rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade directly with the Fed. “The data wasn’t as horrible as many people expected.”

The yield on the benchmark 10-year note rose 11 basis points, or 0.11 percentage point, to 1.55 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield rose as many as 15 basis points, the most since March 14. The 1.75 percent note maturing in May 2022 fell 32/32, or $10.00 per $1,000 face amount, to 101 27/32. The yield has climbed from a record low 1.379 percent on July 25 after declining from 1.6003 percent on July 20.

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $330.3 billion at 5:03 p.m. in New York, the highest since June 6. Trading has averaged $240.1 billion this year.

‘Buying Point’

Investors should view the rise in yields from record lows as an “attractive buying point,” Brett Rose, an interest-rate strategist in New York at primary dealer Citigroup Inc., wrote today in a report. “Ultimately, we expect that many of the same things that have guided yields lower over the past year will drive yields even lower.”

ECB President Mario Draghi and Bundesbank President Jens Weidmann will hold talks in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said.

The central-banker meeting “definitely spooks people” who own longer-term Treasuries, said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA.

‘Comfort Zone’

U.S. gross domestic product, the value of all goods and services produced in the nation, rose at a 1.5 percent annual rate. That followed a revised 2 percent pace in the prior quarter, and compared with the 1.4 percent median forecast of economists surveyed by Bloomberg News.

“The market was positioned for Armageddon,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “We’ll go back to comfort zone, 1.5 percent. That could be comfort for the market, but it may take a little bit more to get there.”

Treasuries declined earlier on speculation major central banks globally will boost measures to revive the global economy. The ECB and Bank of England also meet next week, and the Bank of Japan gathers Aug. 9.

Spanish and Italian bonds surged for a third day as Italy’s 10-year yields fell below 6 percent for the first time in a week after Le Monde reported that the ECB is preparing to buy securities in the secondary market, followed by primary-market purchases from the region’s bailout funds. A spokeswoman for the ECB declined to comment.

The Italian 10-year yield dropped as low as 5.83 percent, dipping below 6 percent for the first time since July 20. Spanish 10-year bond yields fell as low as 6.70 percent.

Merkel, Hollande

Two-year notes headed for the first weekly loss since June as German Chancellor Angela Merkel and French President Francois Hollande said their countries are “bound by the deepest duty” to keep the monetary union intact.

France and Germany both seek “quick” implementation of resolutions made at a June 28-29 European Union summit, according to the statement.

“Still, we can’t go too much higher in yield as there are still massive concerns in Europe,” said RBC’s Cloherty. “And domestically we are still seeing slower growth.”

The U.S. central bank sold $7.93 billion of Treasuries due from May to September 2015 today. The sales are part of the central bank’s effort, known as Operation Twist, to swap short-term Treasuries in its holdings for those with longer maturities, supporting the economy by pushing long-term borrowing costs lower.

‘Common Ground’

While Fed policy makers at their meeting last month refrained from introducing a third round of asset purchases, a tactic known as quantitative easing, Chairman Ben S. Bernanke indicated that it’s an option. The benchmark rate has been in a range between zero and 0.25 percent since December 2008.

RBC’s Cloherty said he expects the Fed to announce a new round of asset purchases at the September FOMC meeting.

Consumers are cutting back just as Europe’s debt crisis and looming U.S. tax-policy changes dent confidence, hurting sales at companies from United Parcel Service Inc. to Procter & Gamble Co. Cooling growth makes it harder to reduce unemployment, helping explain why Fed Chairman Ben S. Bernanke has said policy makers stand ready with more stimulus if needed.

“The U.S. economy needs help right now to escape the quicksand, and policy makers have shown absolutely no willingness to seek common ground on virtually any measure,” Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York, wrote in a note to clients. “The U.S. economy, which is already being depressed by the lingering effects of the recession, is being held hostage to politics.”

Ten-year notes have returned 5.8 percent this year and 2.2 percent this month, compared with a 3.1 percent gain by Treasuries overall this year and 1.4 percent this month, according to Bank of America Merrill Lynch indexes.

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