Treasuries pare loss as Spanish aid seen as short-term solution

June 11 (Bloomberg) -- Treasuries pared a decline on speculation a bailout of Spanish banks will provide only a short-term solution the region’s sovereign-debt crisis now in its third year.

U.S. government securities also reversed losses as Spanish and Italian bonds slid on bets the 100 billion euros ($126 billion) of aid for Spain’s banks won’t be enough to stop turmoil from spreading. Treasuries fell earlier as stocks advanced, luring investors to higher-yielding assets. The U.S. will auction $66 billion of notes this week, starting with $32 billion of three-year securities tomorrow.

“The disappointment is focused on that the loans do not go directly to the banks but go on Spain’s balance sheet,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The market, after digesting that, is focused on the Greek election on Sunday, which is probably a more important event for the financial markets.”

The benchmark 10-year yield rose 1 basis point to 1.65 percent at 9:24 a.m. New York time, according to Bloomberg Bond Trader prices. The yield earlier rose as much as nine basis points to 1.73 percent, the highest since May 30. The 1.75 percent note due in May 2022 declined 3/32 or 94 cents to 100 30/32.

Spain requested the funds during a regional conference call on June 9, becoming the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago. Prime Minister Mariano Rajoy characterized the deal as a credit line for banks and an endorsement of his policies.

Spain’s 10-year bond yield advanced 21 basis points, or 0.21 percentage point, to 6.42 percent after declining as much as 20 basis points.

No Solution

“The relief was very short-lived indeed,” said Michael Leister, a rates strategist at DZ Bank AG in Frankfurt. “As usual the market is digging into the detail and doesn’t like the fact that many key issues are yet unknown. Treasuries have been dragged along by German bunds, which have also recovered from this morning’s lows.”

Treasuries have gained 3 percent this quarter through June 8, based on Bank of America Merrill Lynch data, as concern Greece will exit the euro and increasing unemployment in the U.S. prompted investors to seek the safety of U.S. debt.

The average yield on bonds issued by the Group of Seven nations has fallen to 1.12 percent from 3 percent in 2007, Bank of America Merrill Lynch index data show. Germany’s two-year note yield fell below zero for the first time on June 1, while Switzerland’s has been negative since April 24, meaning investors are paying for the right to lend the nation money.

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