Treasury yields climb most in three months on European outlook

U.S. prepared to sell $66 billion of notes and bonds

Interest rates, data, question mark Interest rates, data, question mark

June 9 (Bloomberg) -- Treasury yields had the biggest weekly increase in almost three months as bets European leaders may make progress stemming their debt crisis damped haven demand and the U.S. prepared to sell $66 billion of notes and bonds.

U.S. bond yields climbed amid reduced volume after tumbling to record lows on June 1. European officials were awaiting a request for aid to shore up Spanish banks, European Central Bank Vice President Vitor Constancio said yesterday. Federal Reserve Chairman Ben S. Bernanke said on June 7 the U.S. has options for further monetary easing.

“There has been cautious optimism that Europe is ready to get their act together,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “And the market still has supply to deal with. Still, policy makers seem to only act when they are at the edge of a cliff.”

The 30-year bond yield increased 23 basis points, or 0.23 percentage point, to 2.75 percent yesterday in New York, according to Bloomberg Bond Trader prices, from 2.52 percent on June 1. It was the biggest jump since the five days ended March 16. The 3 percent security due in May 2042 slid 4 7/8, or $48.75 per $1,000 face amount, to 105 5/32.

Ten-year note yields increased 18 basis points, also the most since March 16, to 1.64 percent.

Volume Drops

Trading volume shrank. About $227 billion of Treasuries changed hands this week through ICAP Plc, the world’s largest interdealer broker. It was a 36 percent drop, the most since the five days ended May 25. Volume surged 148 percent last week to $351 billion.

Ten- and 30-year yields reached the lowest ever, 1.4387 percent and 2.5089 percent, on June 1 as government data showed U.S. job growth trailed estimates and concern festered Europe’s debt crisis would worsen. They touched 2012 highs in March, 3.49 percent for the long bond and 2.4 percent for the 10-year note.

Treasuries have returned 2.99 percent this quarter, compared with a 2 percent gain by sovereign debt of all Group of Seven nations, Bank of America Merrill Lynch indexes showed.

A valuation measure showed U.S. government bonds were at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.83 percent yesterday after reaching negative 0.94 percent, the record, a week earlier. The average over the past year is negative 0.44. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Aid Package

European finance ministers will discuss this weekend a possible aid package for Spain, according to an official who declined to be identified because the matter is confidential. Greece, Ireland and Portugal have received international bailouts.

Fitch Ratings downgraded Spain by three levels to BBB on June 7, taking the rating to two steps off non-investment grade. The cost to the state of shoring up banks may amount to as much as 100 billion euros ($125 billion), compared with its previous estimate of 30 billion euros, Fitch said.

Spain’s 10-year bond yield climbed as much as 18 basis points yesterday to 6.27 percent. Prime Minister Mariano Rajoy said for the first time he’s discussing with European leaders how to help Spanish banks.

“There remains a fair amount of uncertainty in the air, and asset markets have been fairly disappointed about the lack of commitment from Bernanke with respect to additional imminent easing,” Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York, said yesterday. “Any backup in yield will be met with buying until something changes with regards to the global growth picture and Europe.”

Next page: ECB Ready

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