Treasuries fall on Draghi comments as U.S. sells 7-year notes

Treasury Returns

Seven-year notes have returned 4.5 percent this year, compared with a 3.2 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven- year securities returned 13.7 percent in 2011, while Treasuries overall gained 9.8 percent.

The government sold $35 billion of two-year notes on July 24 at a record low yield of 0.22 percent and the same amount of five-year notes yesterday at a yield of 0.584 percent, also a record.

A report tomorrow is forecast to show the U.S. economy probably expanded in the second quarter at the slowest pace in a year. Gross domestic product, the value of all goods and services the nation produced, rose at a 1.4 percent annual rate after a 1.9 percent gain in the prior quarter, according to the median forecast of 81 economists surveyed by Bloomberg News.

The Federal Open Market Committee next meets on July 31 and Aug. 1. While policy makers refrained from introducing a third round of asset purchases at their meeting last month, Fed Chairman Ben S. Bernanke indicated in two days of testimony in Washington ending July 18 that it’s an option. The benchmark rate has been in a range between zero and 0.25 percent since December 2008.

‘Less Effective’

“The Fed will extend its forward guidance to ‘at least through late-2015’ on Aug. 1, rather than through ‘mid-2015,’’ Ethan Harris, co-head of global economics research, and Priya Misra, head of U.S. rates strategy at Bank of America Corp. in New York, wrote in a note to clients today.

The primary dealer also expects the Fed to announce on Sept. 13 a $600 billion program to purchase Treasuries and mortgage-backed securities, through another quantitative easing program, dubbed QE3, up from a previous forecast of $500 billion, they wrote.

About 65 percent of QE3 is priced in, much lower than before QE2 was announced, they wrote, noting that QE3 will be ‘‘much less effective’’ than the first two QE programs, both in terms of boosting risky assets and stimulating the economy.

‘Our Mandate’

The euro jumped against the dollar by the most in almost a month, climbing as much as 1.4 percent after Draghi’s comments earlier.

‘‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,’’ Draghi said during a speech in London today. ‘‘And believe me, it will be enough.’’

His comments came as Spanish policy makers called on the ECB to do more to fight a renewed bout of financial turmoil that pushed the yields on the country’s bonds to the highest level in the euro era this week. Yields on the Spanish government’s 10- year bonds declined to 6.93 percent today after climbing to a euro-era record of 7.75 percent yesterday.

‘‘We’re waiting to see some real concrete measures from the ECB,” 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. “We need firm action. It’s a buy-the-dip opportunity on Treasuries.”

Bloomberg News

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