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Treasuries Snap Gain on Economic Data Before Fed Announcement

Treasuries snapped a two-day gain as private reports showed July jobs growth exceeded forecasts and U.S. manufacturing rose, easing pressure on the Federal Reserve to announce more bond purchases.

U.S. government securities fell along with their German counterparts after Italy’s Prime Minister Mario Monti said his country doesn’t need to be bailed out, reducing demand for the safest assets. The Fed will decide against another round of quantitative easing when it ends a two-day meeting today, according to economists surveyed by Bloomberg News.

“All eyes are on the Federal Reserve,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “They jury is still out until we get confirmation from the Fed one way or the other and what language we are going to get if any. The market doesn’t expect much, but we are still held hostage to policy makers.”

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 1.50 percent at 1:43 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 fell 9/32, or $2.81 per $1,000 face amount, to 102 1/4. The 30-year yield also increased five basis points to 2.59 percent.

Bond Returns

Treasuries handed investors a 1.1 percent last month, compared with a 2 percent gain from German bonds, according to indexes compiled by the European Federation of Financial Analysts Societies.

The difference in yields between 10-year notes and TIPS, which represents traders’ expectations for the rate of inflation during the life of the securities and is known as the break-even rate, was 2.13 percentage points, the highest since June 21. It is down from the 2012 high of 2.45 percentage points on March 20. It touched a 2012 low of 1.9 percentage points on Jan. 3.

Treasury announced plans to sell $72 billion of notes and bonds next week. It will auction $32 billion of three-year notes on Aug. 7, $24 billion of 10-year notes the next day and $16 billion of 30-year bonds on Aug. 9.

The Treasury Department also said it is developing a floating-rate note program that could be operational in a year or more, while it is preparing for possible negative-rate bidding.

Floating Rates

“Treasury plans to develop a floating-rate note program to complement the existing suite of securities issued and to support our broader debt-management objectives,” the department said in a statement today in Washington. “The first FRN auction is estimated to be at least one year away.”

Companies in the U.S. added 163,000 workers in July, according to figures from Roseland, New Jersey-based ADP Employer Services. The median estimate in a Bloomberg News survey called for an advance of 120,000.

The Institute for Supply Management’s factory index rose to 49.8 in July from 49.7 a month earlier, the Tempe, Arizona-based group’s report showed today. Fifty marks the dividing line between expansion and contraction. Economists surveyed by Bloomberg News projected a reading of 50.2, according to the median forecast.

The Federal Open Market Committee will refrain from starting new bond purchases, 88 percent of economists said before today’s decision in Washington. Forty-eight percent said the FOMC will announce the buying at its Sept. 12-13 meeting, according to the July 25-27 survey of 58 economists.

Bernanke View

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 central bank’s policy-setting Federal Open Market Committee 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.

The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of quantitative easing, or QE, seeking to cap borrowing costs.

The central bank will buy as much as $2 billion of Treasuries due from February 2036 to May 2042 tomorrow. The purchases are part of the so-called Operation Twist that swaps short-term debt in the Fed’s holdings for longer maturities.

“As for QE3, the bar for balance sheet usage is clearly higher and the Fed would probably love to use language to buy time,” William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed, wrote in a note to clients. “The Fed Chairman’s recent Congressional testimony left strong hints that the Fed is still not sure of recent weakness is transitory or trend. So why not wait until next month to have more dots to connect for that view?”

Europe’s Debt

Spanish bonds rose before a European Central Bank meeting tomorrow that may end with new measures to contain the region’s debt crisis.

Italy’s economy doesn’t need a bailout, Monti said in an interview with Finnish newspaper Helsingin Sanomat. The country may need some support as “markets are slow to understand the measures it has taken and all it has achieved,” the newspaper reported him as saying.

Potential ECB action “is informing the better tone in Spanish and Italian markets, which feeds back into the bearish tone for safe-haven paper such as Treasuries,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “The outlook for Treasuries remains constructive” amid the global economic slowdown, he said.

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