Treasury Yields Rise From 1-Month Lows on ECB Speculation

Treasury yields rose from almost one-month lows after details of the European Central Bank’s bond-buying proposal suggested the bank will make unlimited sovereign-debt purchases, damping U.S. securities’ haven appeal.

Thirty-year bond yields fell earlier before data this week forecast to show U.S. payroll growth slowed, adding to bets the Federal Reserve will begin a third round of asset purchases to stimulate the economy. The U.S. central bank meets next week.

“Any good news out of Europe is a marked change from what we’ve been used to,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that trade with the central bank. “The fact that we’re up” in yields “is a positive sign,” he said.

Thirty-year bond yields increased three basis points, or

0.03 percentage point, to 2.71 percent at 5 p.m. in New York after falling earlier to 2.66 percent. They reached 2.65 percent yesterday, the lowest level since Aug. 7. The price of the 2.75 percent security due in August 2042 dropped 1/2, or $5 per $1,000 face amount, to 100 7/8.

Ten-year note yields advanced two basis points to 1.60 percent, after declining earlier to 1.55 percent. They touched

1.54 percent yesterday, the lowest since Aug. 6.

The potential for a significant increase in yields was limited by the potential for additional Fed monetary easing, Kohli said.

Cost Declines

Treasuries slipped this week from the most expensive level in a month. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.93 percent today, versus negative 0.96 percent on Aug. 31, the most costly on a closing basis since July 31. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for this year is negative 0.73 percent.

U.S. government bonds have returned 2.5 percent in 2012 through yesterday, Bank of America Merrill Lynch index data show. That compares with a 13 percent gain in the Standard & Poor’s 500 Index, including reinvested dividends.

European officials are working to stem the region’s debt crisis, which is in its third year.

The ECB blueprint, which may be called “Monetary Outright Transactions,” will focus on government bonds rather than a broader range of assets and will target maturities of three years or less, according to central-bank officials briefed on the proposal who requested anonymity.

The ECB will sterilize its bond purchases by removing from the system elsewhere the same amount of money it spends, ensuring a neutral impact on money supply, the officials said.

Treasuries ‘Pressured’

“I don’t think it’s a cure-all or the answer, but it’s a step in the right direction,” said Sean Murphy, a trader at the primary dealer Societe Generale SA in New York. “Treasuries were pressured.”

ECB President Mario Draghi told the European Parliament this week the central bank needs to intervene in bond markets to wrest back control of interest rates and ensure the survival of the shared currency. Draghi will make an announcement at a press conference tomorrow after an ECB policy meeting.

“It seems like a plan they can get through,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Budgets have to be adjusted and sacrifices have to be made, but you also have to have growth. This buys them more time and allows, hopefully, for the lower rate mechanism to translate into growth for the economy.”

ECB Rate

The ECB will also lower its benchmark interest rate tomorrow to 0.5 percent, from 0.75 percent, economists in a Bloomberg News survey forecast.

The U.S. central bank bought $4.7 billion of Treasuries today due from November 2020 to August 2022 as part of Operation Twist, a program to swap shorter-term Treasuries in its holdings with longer-term securities to put downward pressure on borrowing costs.

The policy-setting Federal Open Market Committee meets Sept. 12-13. Fed Chairman Ben S. Bernanke, speaking on Aug. 31 in Jackson Hole, Wyoming, said the costs of “nontraditional policies” appeared manageable when considered carefully. He said he wouldn’t rule out steps to lower a jobless rate he described as a “grave concern.”

The U.S. unemployment rate exceeded 8 percent in August for a 43rd month, and payrolls increased by 127,000 jobs, fewer than the 163,000 added in July, economists surveyed by Bloomberg forecast before the Labor Department reports the data Sept. 7.

The central bank purchased $2.3 trillion of securities from 2008 to 2011 in two rounds of the stimulus strategy known as quantitative easing.

Inflation ‘Headwind’

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors face an “age of inflation, which typically provides a headwind, not a tailwind, to securities prices -- both stocks and bonds.”

Pimco’s founder and co-chief investment officer reiterated that institutional investors will continue to find the highest returns in countries with faster growth rates and warned that nations such as the U.S., where he has favored Treasury debt, offer risk in the long term. His statements were in his monthly investment outlook posted on the Newport Beach, California-based company’s website today.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt known as the break-even rate, widened to 2.30 percentage points. The average this year is 2.19 percentage points.

The government will auction $66 billion in notes and bonds next week, Michael Cloherty, head of U.S. rates strategy at Royall Bank of Canada’s RBC Capital Markets unit in New York, wrote in a note before the Treasury announces the amounts tomorrow. The firm is a primary dealer.

The offerings will be $32 billion of three-year debt, $21 billion of 10-year securities and $13 billion in 30-year bonds, in line with the majority of auctions of the three securities since 2010, he wrote.