Treasuries Fall Before ECB Meeting, as Asian Stocks Gain

Treasuries declined before the European Central Bank holds a policy meeting this week on prospects the ECB will buy bonds to lower government borrowing costs in the euro area.

U.S. debt pared a monthly advance as Asian stocks climbed, sapping the allure of Treasuries as a haven. Five-year note yields were about nine basis points from a record low as the Federal Reserve starts a two-day meeting today amid speculation it will take measures to keep interest rates lower to stimulate the world’s largest economy.

“Demand for Treasuries as a safe asset is easing because of expectations for policy development in Europe,” said Hitoshi Asaoka, a Tokyo-based senior strategist at Mizuho Trust & Banking Co., a unit of Japan’s third-largest bank by market value. “People are expecting the ECB to buy Spanish and Italian bonds to curb increases in their borrowing costs.”

The 10-year yield gained two basis points to 1.52 percent as of 6:39 a.m. in London. The 1.75 percent security due May 2022 lost 5/32, or $1.56 per $1,000 face amount, to 102 3/32, according to Bloomberg Bond Trader data. Five-year yields were little changed from yesterday at 0.62 percent, compared with the all-time low of 0.53 percent on July 25.

The MSCI Asia Pacific Index of shares climbed 1.2 percent.

Japan’s 10-year bond yield added one basis point to 0.79 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. It reached 0.72 percent on July 23, the lowest since June 2003.

ECB Policy

Ten-year Treasury yields completed a three-day, 16 basis point increase on July 27 after ECB President Mario Draghi said the central bank is “ready to do whatever it takes to preserve the euro.”

Members of the ECB’s Governing Council will meet on Aug. 2. to determine their next move to combat the debt crisis that has pushed up borrowing costs for Italy and Spain, the euro area’s third- and fourth-largest economies.

Spanish 10-year yields have pared their advance since climbing to a euro-era record of 7.75 percent on July 25. The benchmark rate slid to 6.61 percent yesterday. The equivalent rate in Italy has dropped to 6.03 percent from a six-month high of 6.71 percent.

Government of Singapore Investment Corp., a manager of more than $100 billion, cut investments in bonds to 17 percent of its portfolio in the year ended March 31 from 22 percent a year earlier, according to its annual report. The sovereign wealth fund boosted cash holdings to 11 percent from 3 percent.

“We reduced the allocation to bonds because bond yields in the developed markets had been pushed down to abnormally low levels by the flight to safe assets and central bank intervention,” Chief Investment Officer Ng Kok Song wrote in the report.

Fed Expectations

Ten-year Treasury yields have fallen 13 basis points in July as expectations for additional monetary easing by the Fed boosted demand for the securities.

Fed Chairman Ben S. Bernanke said on July 17 that policy makers are “looking for ways to address the weakness in the economy should more action be needed.” The U.S. central bank said in January that its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014, extending its pledge from the middle of 2013.

“If the late-2014 guidance for the first rate hike is extended to 2015, its main impact will be felt in the 5-year sector,” Bulent Baygun, head of U.S. interest-rate strategy at BNP Paribas SA in New York, wrote in a research note yesterday. Investors betting on the extension should buy five-year notes, whose rates may fall to 0.5 percent, the strategist wrote.

U.S. Economy

U.S. consumer spending probably rose 0.1 percent in June following no change in May, according to the median estimate of economists in a Bloomberg News survey taken before the Commerce Department releases figures today.

The Conference Board’s index of consumer confidence probably fell in July for a fifth month, the longest stretch of declines since the first half of 2008, a separate poll of economists showed. The gauge is estimated to have fallen to 61.5 from 62 in June.

“We can’t expect a significant improvement in the U.S. economy, and that’s weighing on Treasury yields,” said Makoto Suzuki, a senior bond strategist in Tokyo at Okasan Securities Co. “The Fed may extend its pledge to keep interest rates low for longer.”

The Fed is scheduled today to buy as much as $5 billion of Treasuries maturing in July 2018 to May 2020. The purchases are part of the central bank’s plan, known as Operation Twist, to swap short-term debt in its holdings for longer maturities.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE