Treasuries Drop on Fed Minutes as Oil Jumps on Supplies

Treasuries dropped for the first time in three days as Federal Reserve meeting minutes failed to lower speculation that the central bank will reduce its stimulus efforts this year. U.S. stocks closed little changed, while oil reached the highest since March 2012.

Ten-year Treasury yields added 4.5 basis points to 2.68 percent while the Standard & Poor’s 500 Index closed up less than 0.1 percent after swinging between gains and losses following the 2 p.m. release of the minutes. The Dollar Index lost 0.6 percent to 84.04, retreating from the highest level since July 2010. Oil jumped 2.9 percent to $106.52 a barrel after U.S. inventories tumbled for a second week.

Minutes from the Fed’s June meeting showed that “several members judged that a reduction in asset purchases would likely soon be warranted.” Still, “many members” of the policy-setting committee want to see further improvement in the labor market before reducing $85 billion in monthly asset purchases, the minutes showed. Concern the Fed will begin tapering its purchases led to a 5.8 percent drop in the S&P 500 from May 21 to June 24 and sent 10-year Treasury yields to a two-year high.

“The Fed is going to taper at some point,” said Paul Montaquila, fixed-income investment officer with BNP Paribas SA’s Bank of the West and BNP Paribas Securities Corp. “The buying is going to stop at some point. Rates will not be heading back to dramatic historical lows from here. Clearly that’s baked into this market.”

Dollar, Stocks

Thirty-year Treasuries also declined, sending yields up four basis points to 3.69 percent. Two-year yields were little changed at 0.37 percent. Government debt initially erased losses after the minutes. Yields rose earlier as the U.S. sale of $21 billion in 10-year notes produced the highest yield since July 2011.

The Fed’s June meeting was before the Labor Department’s employment report for that month exceeded expectations, with the economy adding 195,000 jobs and the unemployment rate unchanged at 7.6 percent.

The dollar weakened against 11 of 16 major peers, losing 0.8 percent to $1.2885 versus the euro. The yen rallied against all 16 major peers on speculation the Bank of Japan will not add to stimulus efforts when it announces its policy decision tomorrow. The BOJ will leave its bond-buying program unchanged, according to all 20 economists in a Bloomberg News survey.

Among stocks moving in the U.S., Hewlett-Packard Co. rose 1.8 percent after Citigroup Inc. advised investors to buy the stock. Family Dollar Stores Inc. added 7.1 percent as the retailer’s earnings topped estimates.

Earnings Season

The S&P 500 has risen for five straight days, and closed today about 1 percent below its record high, amid optimism about the second-quarter earnings season. Yum! Brands Inc. reports earnings today, while JPMorgan Chase & Co. and Wells Fargo & Co. are among companies releasing results this week. Analysts forecast that profits at financial companies increased 17 percent in the second quarter to lead a 1.8 percent growth in S&P 500 earnings, according to estimates compiled by Bloomberg.

The U.S. benchmark has recovered following a 4.8 percent drop from June 19 to 24, triggered when Bernanke said the central bank may reduce its $85 billion of monthly bond-buying this year and end the program in 2014 as economic risks subside. The index is up 16 percent for the year.

European Markets

The Stoxx Europe 600 Index closed up less than 0.1 percent at its highest level in a month. Burberry Group Plc jumped 4.8 percent after the U.K.’s largest luxury-goods maker posted retail sales for its fiscal first quarter that exceeded analysts’ estimates. Mining companies retreated, with Anglo American Plc and Rio Tinto Group down about 1 percent each.

Italian bonds fell, pushing the 10-year yield four basis points higher to 4.45 percent, after S&P cut the nation’s credit rating. The FTSE MIB Index of Italian stocks lost 0.7 percent.

S&P yesterday cut Italy’s long-term credit rating to BBB, two levels above junk, from BBB+, citing expectations for a weakening in economic prospects and the nation’s impaired financial system. The outlook on the rating remains negative, the New York-based ratings company said in a statement.

Asian stocks pared gains after China’s exports and imports unexpectedly contracted in June.

About five stocks rose for every four that fell in the MSCI Asia-Pacific Index, which advanced 0.8 percent. The Shanghai Composite Index jumped 2.2 percent, gaining the most in almost four months, on speculation the government will take measures to support economic growth. There’s some speculation about a cut in the reserve-requirement ratio, said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages $120 million.

China Data

Data today showed China’s exports fell 3.1 percent in June from a year earlier, compared with the median estimate of a 3.7 percent gain in a Bloomberg News survey. Imports declined 0.7 percent after a 0.3 percent drop in May. China’s economy probably expanded 7.5 percent in the three months ended June 30, according to the median estimate in a Bloomberg News survey before data due July 15. That’s down from 7.7 percent in the first quarter and 7.9 percent in the last three months of 2012.

The S&P GSCI advanced 1.1 percent to the highest in three months as nickel and gasoline jumped at least 2.4 percent to lead gains. Oil rallied after U.S. supplies tumbled for a second week as refinery operating rates increased, boosting speculation that a glut in the central part of the country is dissipating.

Japan’s Topix declined from a seven-week high as the yen strengthened against all its 16 major peers. Thirteen of 20 economists in a Bloomberg News survey completed July 8 saw no extra loosening by the BOJ in the next six months, a reversal from a poll in May.

BOJ Governor Haruhiko Kuroda and his fellow policy makers will discuss strengthening their assessment of the nation’s economy by using the word “recover” for the first time in more than two years, according to people familiar with the central bank’s discussions.

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