Treasuries fall third day before European summit, note auctions

May 22 (Bloomberg) -- Treasuries fell as investors speculated the slide in 10-year yields to almost record lows was difficult to sustain before European leaders meet tomorrow in Brussels to address the region’s fiscal crisis.

U.S. 10-year note yields rose for a third day, the longest streak in two months, before the U.S. auctions $99 billion in debt starting today. Sales of existing homes in the U.S. increased more than forecast in April. The central bank plans to sell as much as $8.75 billion of Treasuries due from March to September 2013 today, according to the Federal Reserve Bank of New York’s website.

“We were severely overbought,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “The market has only been able to be long because of the headline risk in Europe. You get to levels where you just can’t sustain those moves, and we’re at those levels. There’s hope in Europe with the meeting tomorrow.”

The benchmark 10-year yield rose six basis points, or 0.06 percentage point, to 1.80 percent at 10:07 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 declined 17/32, or $5.31 per $1,000 face amount, to 99 17/32.

The yield dropped to 1.6886 percent on May 17, approaching the record low 1.6714 percent set Sept. 23. It declined 12 basis points last week.

Note Sale

The U.S. plans to sell $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year securities on May 24.

Two-year notes yielded 0.31 percent in pre-auction trading, compared with 0.27 percent at the previous sale on April 24. Investors bid for 3.76 times the amount of available debt in April, the most since November at the monthly auctions.

Indirect bidders, the category of buyers that includes foreign central banks, purchased 32.1 percent at the last sale, the lowest level since December.

“Twos will go fine,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “At the end of the day, Europe has been more willing to talk than act. Maybe tomorrow will be more talk about solutions rather than enacting anything.”

The two-year notes yielded 23 basis points more than similar-maturity securities in Germany. The spread reached a quarter percentage point on May 17, the most in almost two years.

European Union leaders are scheduled to meet tomorrow in Brussels amid speculation Greece will quit the euro. They plan to address the region’s fiscal crisis, damping demand for the safest securities.

Purchases of previously owned houses, tabulated when a contract closes, increased 3.4 percent to a 4.62 million annual rate, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a rise to a 4.61 million rate.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents expectations for the rate of inflation during the life of the securities, increased for a third day. It climbed to as much as 2.21 percentage points today, the most since May 8.

Yield Forecast

The yield on the 10-year note will end the year at 2.4 percent, according to the median forecast of 68 economists in a Bloomberg News survey.

UBS AG, one of the 21 primary dealers that deal directly with the Fed, trimmed its forecast for the benchmark 10-year yield to 2.4 percent by year-end from 2.7 percent on May 14, based on figures provided yesterday for a Bloomberg survey by Sophie Constable, an analyst in London.

Volatility yesterday dropped to 69.1 basis points from 70.6 basis points on May 18, according to Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options. The gauge is below the one-year average of 87.94 basis points.

Trading volume dropped yesterday to the lowest since May 11. About $166 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker. The average in 2012 is $242 billion. Volume reached $439 billion on March 14, the highest since August.

Bloomberg News

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