Treasuries reach lowest on ECB stimulus measures

Treasury 10-year notes (CBOT:ZNM14) touched a more than three-week low after European Central Bank President Mario Draghi unveiled an unprecedented round of measures to support an economy threatened by deflation.

The benchmark securities erased earlier gains after fewer Americans filed applications for unemployment benefits over the past month than at any time in seven years. European stocks rose after Draghi said officials will start work on purchases of asset-backed securities and the ECB cut its record-low interest rates.

“Draghi delivered as expected, which is causing stocks to rise and, along with the better economic data, it’s causing bonds to fall,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The weekly claims number continues a series of positive numbers which has sparked the risk atmosphere and taken some of the steam out of the Treasury market.”

The U.S. 10-year yield was little changed at 2.6% at 10:06 a.m. New York time, according to Bloomberg Bond Trader prices, after touching 2.64%, the highest since May 13. The 2.5% note maturing in May 2024 cost 99 2/32.

The 10-year note yield rose the previous five days and has climbed 20 basis points since touching 2.4% on May 29, the lowest level since June 2013.

The Stoxx Europe 600 Index added 0.8% and Germany’s DAX Index briefly topped 10,000 for the first time.
 

ECB Action
 

The Bank of America Merrill Lynch MOVE Index, which measures price swings based on options, climbed four basis points to 64.9 basis points yesterday, the biggest gain since April 2.

Treasuries dropped as the ECB cut its deposit rate to minus 0.1% and Draghi said the bank will introduce new, “targeted” offerings of liquidity to banks to encourage them to lend money to the real economy. Officials will also start work on purchases of asset-backed securities, he said.

“We decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy,” Draghi told reporters in Frankfurt.

U.S. two-year yields at 0.38% were about 32 basis points more than those on similar-maturity German debt, down from 34 basis points on June 3, the widest since 2007, according to closing-price data compiled by Bloomberg.
 

Draghi ‘Anticipation’
 

“The market obviously rallied tremendously last week and the week before in anticipation” of Draghi, Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities U.S.A. Inc, said in a telephone interview. “People are getting a little more comfortable with maybe there’s going to be a wider gap between our interest rates and theirs and maybe we ran a little too far last week.”

The four-week average for jobless claims fell to 310,250 in the period ended May 31, the lowest since June 2007, a Labor Department report showed in Washington. The number of applications last week climbed to 312,000 from 304,000, in line with the median forecast of economists surveyed by Bloomberg.

A U.S. Labor Department report tomorrow will show employers added 215,000 jobs in May, compared with 288,000 in April, according to responses from economists.

“Treasuries won’t stray too far from these levels because of the overhang of tomorrow’s nonfarm payrolls report,” said GMP’s Miller.

The Federal Reserve is tapering its monthly asset purchases as officials debate an exit to its ultra-loose monetary policy. The central bank will announce its next policy decision on June 18 after signaling at its April 29-30 meeting that low rates would persist for a “considerable time.”

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