Treasury 10-year note erases loss on Fed stance, ECB in Greece

May 16 (Bloomberg) -- Treasuries erased losses as Federal Reserve policy makers said more economic stimulus may be needed and the European Central Bank said it will suspend some operations with Greek banks due to incomplete recapitalizations.

Ten-year notes fluctuated after Fed officials said a loss of momentum or increased risks to their economic outlook could warrant additional action to keep the recovery on track, minutes of their last meeting showed. U.S. government debt declined earlier as optimism about the economic outlook damped demand for safe assets.

“With the minutes, there probably is a little recalibration going on,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s an indication that the Fed has a certain degree of resolve to do something if the economy should falter.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 1.76 percent at 2:28 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 rose 3/32, or 94 cents per $1,000 face amount, to 99 30/32.

Ten-year yields climbed as high as 1.82 percent earlier after reports showed U.S. builders broke ground on more homes than forecast in April and industrial production climbed more than projected, propelled by gains in auto manufacturing and utility use.

Yield Levels

The yield also touched 1.75 percent, the lowest since Oct. 4. It reached a record low 1.67 percent on Sept. 23 after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.

Treasuries returned 2.7 percent in the past two months, Bank of America Merrill Lynch indexes show, as Europe’s debt crisis worsened. Investors tracking the MSCI All-Country World Index of stocks lost 8.4 percent in the same period.

The U.S. government will sell $13 billion of 10-year inflation-indexed bonds tomorrow.

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.11 percentage points after falling to 2.09 points May 14, the least since Feb. 1. The figure is close to the 2.15 percentage point average during the past decade.

Fed Policy

The Fed cut its target for the federal funds rate, which banks charge each other for overnight loans, to a range of zero to 0.25 percent in December 2008. It repeated in its latest statement April 25 that economic conditions will probably warrant keeping the target low at least through late 2014.

“Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough,” according to minutes of the Federal Open Market Committee’s April 24-25 meeting released today in Washington.

“Markets just reacted to increased odds of potential policy,” said John Briggs, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “If they’re going to do additional easing in a few months, or a month or two, that means the first hike is further off.”

Housing starts rose 2.6 percent to a 717,000 annual rate from March’s revised 699,000 pace that was stronger than previously reported, Commerce Department figures showed today in Washington. The median estimate of 80 economists surveyed by Bloomberg News called for a rise to 685,000.

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