Treasuries Fall, Snapping 2-Day Gain, on ECB Speculation

Treasury 10-year note yields climbed from the lowest level in almost a month on speculation the European Central Bank will announce measures as soon as this week to ease the euro region’s debt crisis.

The 10-year yield earlier fell to a four-week low before data today that economists said will show manufacturing is struggling to expand, giving the Federal Reserve ammunition to boost bond purchases in the form of quantitative easing to spur growth. ECB President Mario Draghi told lawmakers yesterday he would be comfortable buying government debt with maturities of as much as about three years to bring down borrowing costs for nations in distress.

“We’re moving closer to the point where the ECB has to deliver,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “They cannot fail the market or there will be a huge disruption. The market may soften up going into the economic data. People are waiting to see if the numbers skew themselves in one direction or another to see if we’ll get QE in September out of the Fed.”

The benchmark 10-year yield rose two basis points, 0.02 percentage point, to 1.57 percent as of 8:15 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 4/32, or $1.25 per $1,000 face amount, to 100 17/32. The rate earlier declined to 1.54 percent, the lowest level since Aug. 6.

The Fed will purchase six to 30-year securities in two separate transactions today.

ECB Meets

The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.95 percent, near the most costly since July 31. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the year is negative 0.73 percent.

Draghi told lawmakers yesterday that purchasing short-maturity notes doesn’t constitute state financing, according to Jean-Paul Gauzes, a member of the European Parliament.

The ECB is scheduled to hold a policy meeting in two days. European Union President Herman Van Rompuy is meeting in Berlin with German Chancellor Angela Merkel today as Italian Prime Minister Mario Monti meets French President Francois Hollande in Rome.

Factory Index

U.S. government bonds have returned 2.6 percent this year, Bank of America Merrill Lynch index data show. That compares with a 14 percent gain in the Standard & Poor’s 500 Index, including reinvested dividends.

The Institute for Supply Management’s U.S. factory index for last month is estimated at 50, the dividing line between growth and contraction and compared with 49.8 in July, according to a Bloomberg News survey of economists.

Speaking on Aug. 31 in Jackson Hole, Wyoming, Fed Chairman Ben S. Bernanke said the costs of “nontraditional policies” appear manageable when considered carefully. That implies Fed policy makers “should not rule out the further use of such policies if economic conditions warrant,” he said.

Comments from policy makers show they are “moving in the direction of quantitative easing and expansion of the Fed’s balance sheet in the fairly near-term,” Craig Veysey, head of fixed income at Principal Investment Management Ltd. in London, said in an interview on Bloomberg Television’s “Countdown” with Linzie Janis. “They are clearly concerned about economic growth and in particular the impact that’s having on the unemployment situation.”

Fed Purchases

The policy-setting Federal Open Market Committee will next meet on Sept. 12-13.

The Fed is in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to help lower long-term borrowing costs. The central bank is due to buy as much as $2 billion of Treasuries due from February 2036 to August 2042 and as much as $5 billion of securities maturing in September 2018 to August 2020 today as part of the program, according to the Fed Bank of New York website.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, has averaged 2.54 percent this year. That’s the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast 10-year government notes will yield 1.76 percent by Dec. 31.

The consumer-price index was unchanged in July and June from a month earlier. It fell 0.3 percent in May, the most since December 2008, according to the Labor department.

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