Treasury 10-year note yields rose for the first time in five weeks as European leaders pledged to take steps to resolve the region’s sovereign-debt crisis, damping demand for the safest assets.
European Central Bank President Mario Draghi and the head of the Bundesbank will discuss new rescue measures, which could include bond purchases, two central bank officials said. The leaders of Germany and France said they would do “everything” necessary to save the common currency. The Federal Reserve will announce Aug. 1 whether it intends to take additional measures to bolster the U.S. economy.
“Draghi’s comments have lifted expectations that the ECB is finally ready to act,” said Guy Haselmann, an interest-rate strategist in New York at Bank of Nova Scotia (BNS), one of the 21 primary dealers that trade with the Fed. “The marketplace is expecting something out of the Fed.”
The U.S. 10-year yield rose nine basis points for the week, or 0.09 percentage point, to 1.55 percent, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 26/32, or $8.13 per $1,000 face amount, to 101 27/32.
Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $330.3 billion at 5:03 p.m. yesterday, the highest since June 6. Trading has averaged $240.1 billion this year.
Investors should view the rise in yields from record lows as an “attractive buying point,” Brett Rose, an interest-rate strategist in New York at primary dealer Citigroup Inc., wrote yesterday in a report. “We expect that many of the same things that have guided yields lower over the past year will drive yields even lower.”
The U.S. central bank purchased $2.3 trillion in securities in two rounds of a strategy called quantitative easing from 2008 to 2011 to spur the economic recovery. While Fed policy makers at their meeting last month refrained from introducing a third round of asset purchases, Chairman Ben S. Bernanke indicated that it’s an option.
The Fed has kept it benchmark lending rate in a range between zero and 0.25 percent since December 2008.
“People think the Fed can fire off another round of bond- buying programs,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA. “The payrolls report has disappointed three months in a row. I can’t imagine expectations are very optimistic for that.”
The Labor Department will likely say Aug. 3 that the U.S. economy added 100,000 jobs in July, according to the median forecast of economists in a Bloomberg News survey, an increase over 80,000 the prior month. The unemployment rate is forecast to hold steady at 8.2 percent, another survey shows.
U.S. gross domestic product, the value of all goods and services produced in the nation, rose at a 1.5 percent annual rate. That followed a revised 2 percent pace in the prior quarter, and compared with the 1.4 percent median forecast of economists surveyed by Bloomberg News.
“The market was positioned for Armageddon,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “We’ll go back to comfort zone, 1.5 percent. That could be comfort for the market, but it may take a little bit more to get there.”
Draghi and Bundesbank President Jens Weidmann will hold talks in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said.
The central-banker meeting “definitely spooks people” who own longer-term Treasuries, said Prakash of BNP Paribas.
Treasuries declined yesterday on speculation major central banks globally will boost measures to revive the global economy. The ECB and Bank of England also meet next week, and the Bank of Japan (8301) gathers Aug. 9.
Spanish and Italian bonds surged yesterday after Le Monde reported that the ECB is preparing to buy securities in the secondary market, followed by primary-market purchases from the region’s bailout funds. A spokeswoman for the ECB declined to comment.
Two-year notes posted the first weekly loss since June as German Chancellor Angela Merkel and French President Francois Hollande said their countries are “bound by the deepest duty” to keep the monetary union intact.
France and Germany both seek “quick” implementation of resolutions made at a June 28-29 European Union summit, according to the statement.
“Still, we can’t go too much higher in yield as there are still massive concerns in Europe,” said RBC’s Cloherty. “And domestically we are still seeing slower growth.”
Ten-year notes have returned 5.8 percent this year and 2.2 percent this month, compared with a 3.1 percent gain by Treasuries overall this year and 1.4 percent this month, according to Bank of America Merrill Lynch indexes.
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