U.S. 30-year bonds erase gains before Fed opens policy meeting

June 18 (Bloomberg) -- U.S. 30-year Treasury bonds erased gains before the Federal Reserve opens a two-day policy meeting amid speculation on whether it will take further steps to boost economic growth.

Long bonds advanced earlier amid concern European leaders will struggle to stem their debt crisis even after pro-bailout parties in Greece won enough votes to form a government. The securities reversed gains after the U.S. sold $1.92 billion of long-term Treasuries. Spanish bond yields climbed to more than 7 percent for the first time in the euro era.

“The market shrugged off the good news from Europe and continues to consolidate around these levels,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “A lot of people are waiting for the Fed, as there are still tons of questions, and a lot of people are waiting on the sidelines to see what happens.

The 30-year bond yield was little changed at 2.68 percent at 2:56 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.65 percent earlier, the lowest level since June 6, after rising as much as eight basis points, or 0.08 percentage point, to 2.76 percent. The yield dropped to 2.51 percent, a record, on June 1.

Ten-year note yields rose one basis point to 1.58 percent after earlier falling to 1.56 percent, the lowest since June 8. It reached a record low 1.44 percent on June 1.

‘We Drift’

“All eyes are on Europe and the Fed,” said Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies Group Inc. “There is a ton of stuff that is supposed to happen later in the week, but until then we drift. It’s not advised to put on any position in any direction given the amount of uncertainty out there.”

The Fed bought Treasuries today due from February 2037 to November 2041 as part of its Operation Twist program to replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to lower borrowing costs.

The central bank sold $8.6 billion of Treasuries earlier due from May 2013 to November 2013.

The Fed opens a two-day policy meeting tomorrow.

As the U.S. recovery slows and the central bank’s efforts to boost growth expire, there’s no consensus among the biggest bond dealers that the central bank will begin a fourth round of economic stimulus with consumer and corporate borrowing costs already at record lows.

Stimulus Bets

Signs of faltering growth amid European debt turmoil, combined with inflation below the central bank’s 2 percent target, mean the Fed will announce new steps to boost the economy as soon as this week, according to 12 of the 21 primary dealers. The rest don’t expect action and some say yields near all-time lows limit the effectiveness of more measures by policy makers.

The Fed kept the economy growing for nine straight quarters by pumping $2.3 trillion into the financial system in two rounds of a tactic called quantitative easing, and by shifting $400 billion into longer-term debt. Bank of America Merrill Lynch bond indexes show yields on corporate bonds have fallen to 3.44 percent from more than 8 percent in early 2009.

Royal Bank of Scotland Group Plc’s RBS Securities unit, a primary dealer, forecasts a 60 percent likelihood of additional Fed stimulus through more buying of longer-maturity issues or additional asset purchases.

Further action might have “diminishing impact, but if the impact’s diminishing, that doesn’t mean they shouldn’t do it,” said John Briggs, a U.S. government bond strategist at RBS in Stamford, Connecticut.

Greek Election

Antonis Samaras, leader of Greece’s New Democracy party, said he will work with pro-European parties to form a national salvation government. Samaras, whose party came first in June 17 elections, spoke at the start of a meeting with President Karolos Papoulias, where he received a three-day mandate to form a government.

Group of 20 nations chiefs begin a two-day meeting in Mexico today as Spanish borrowing costs soared to a euro-era record. Spain’s 10-year yield climbed as much as 41 basis points to 7.29 percent, while the euro weakened 0.6 percent to $1.2564 after strengthening earlier to $1.2748.

Bloomberg News

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