By Wes Goodman May 10 (Bloomberg) -- Treasuries tumbled the most in six weeks and bonds dropped from Australia to Japan after European policy makers announced an unprecedented package of loans and securities purchases to rescue the euro. Australia’s 10-year notes fell the most in 2010 as Europe’s efforts to keep Greece’s fiscal woes from triggering a broader sovereign-debt crisis reduced demand for the relative safety of high-grade government securities. The cost of protecting investment-grade bonds in Asia and the Pacific outside Japan plunged the most in a year. “Investors will buy back equities and sell Treasuries,” said Kazuhito Miyabe, who helps oversee $12 billion as head of foreign fixed income in Tokyo at Toyota Asset Management Co., a unit of the world’s largest automaker. “This package will help the euro and the European economy. The flight to quality isn’t over, but it is waning.” U.S. 10-year yields rose 15 basis points to 3.57 percent as of 6:27 a.m. in London, according to data compiled by Bloomberg. It was the biggest increase since March 24. The 3.625 percent security due February 2020 fell 1 6/32, or $11.88 per $1,000 face amount to 100 13/32. Australian 10-year rates climbed 14 basis points to 5.60 percent. In Japan, yields on same-maturity bonds rose two basis points to 1.30 percent. Greek Crisis Investors snapped up high-grade government bonds last week, sending U.S. 10-year yields to this year’s low of 3.26 percent on May 6, as the Greek debt crisis spread. The Dow Jones Industrial Average plunged almost 1,000 points that day, before trimming losses later in the session. The 16 euro governments announced a loan package worth almost $1 trillion and a program of bond purchases to combat a sovereign debt crisis that sent the single currency to a 14- month low last week and pushed up yields in Portugal and Spain. The European Central Bank will embark on “very significant operations,” European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels. “The ECB has taken a decision to intervene in the secondary markets of government securities.” The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan fell 22 basis points to 115 basis points, according to Deutsche Bank AG. The index headed for its first decline in seven days and its biggest drop since May 7, 2009, according to CMA DataVision in New York. Australia’s bond-risk benchmark plummeted the most in 12 months. Credit-default swap indexes are benchmarks for protecting debt against default, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. The euro climbed to $1.2914 from $1.2755 last week, when it slumped 4.1 percent, the biggest drop since the five days ended Oct. 24, 2008. Stock Futures Climb Futures on the Standard & Poor’s 500 Index rallied 2.9 percent, snapping a four-day decline. One gauge of investor sentiment, the so-called payer skew, shows demand for Treasuries has been rising. The cost to hedge against rising yields as measured by the payer skew in options on interest-rate swaps has fallen about 90 percent from a record high in October, Barclays Plc data show. At about four basis points, the measure, which the Treasury Borrowing Advisory Committee flagged as a warning sign in November, is back in line with the average before credit markets seized up in August 2007. The skew measures the difference between volatility, which is a gauge of demand, on one-year options that allow investors to lock-in paying fixed rates on 10-year interest-rate swaps and those that grant the right to receive fixed rates. Not Inflationary The difference, which typically widens when traders anticipate a rise in yields, fell to 4.24 basis points last month, the lowest level since December 2008, and down from a record 37.6 basis points in 2009, according to Barclays data. “The payer skew has fallen off a cliff in the last few months,” said Piyush Goyal, a fixed-income strategist in New York at Barclays, one of the 18 primary dealers that are required to bid at the government debt sales. “The data has not been inflationary, and there is only so much demand from those who want to hedge higher rates.” Investors added to bets on inflation for the first time in a week. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.29 percentage points from 2.15 percentage points on May 7. The spread is still down from 2.45 percentage points on April 30. Investors became more bearish on the outlook for U.S. government debt through the middle of the year, according to a weekly survey by Ried Thunberg ICAP Inc., a unit of ICAP Plc, the world’s largest inter-dealer broker. The company’s sentiment index fell to 46 for the seven days ended May 7 from 47 the week before. A figure of less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 21 fund managers. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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