Treasuries drop first time in 3 days amid wagers on Fed, Europe

‘Significant Risks’

Fed Chairman Ben S. Bernanke said on June 7 that Europe’s situation poses “significant risks” to the U.S. economy and that the Fed was prepared to take action if necessary. U.S. industrial production unexpectedly fell last month and retail sales and consumer prices declined, data showed last week.

Central-bank policy makers will issue a statement after their two-day meeting concludes tomorrow.

“There’s a slight increase in the odds of Fed action,” said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, one of the 21 primary dealers that trade with the Fed.

The Fed’s Operation Twist program, in which it’s selling $400 billion of Treasuries maturing in three years or less and buying an equal amount of bonds with a maturity of six years to 30 years to cap borrowing costs, is set to expire this month.

Fed Purchase

The Fed bought $1.72 billion of Treasuries today due from August 2022 to February 2031 as part of the program, which followed two rounds of debt purchases under quantitative easing, or QE, from 2008 through 2011.

The yield gap between 10-year notes and Treasury Inflation Protected Securities, a signal of traders’ expectations for inflation called the break-even rate, was 2.15 percentage points. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20.

Treasuries remained lower after Commerce Department data showed housing starts in the U.S. dropped 4.8 percent in May to a 708,000 annual pace from a revised 744,000 rate in April that was the highest since October 2008. The median forecast of 77 economists surveyed by Bloomberg News called for a 722,000 pace.

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