By Keith Jenkins and Wes Goodman May 11 (Bloomberg) -- Treasuries rose, trimming their biggest decline since March, as a sliding euro stoked concern that a near $1 trillion European Union rescue package announced yesterday will fail to end the region’s sovereign debt crisis. Ten- and 30-year securities led the gains as the MSCI World Index of stocks fell for the fifth time in six days and U.S. stock-index futures retreated, fanning demand for the relative safety of U.S. debt. The advance came even as the Treasury prepared to auction $38 billion of three-year notes today, to be followed by sales of 10-year securities tomorrow and 30-year bonds on May 13. “There’s a bit of a reversal of yesterday’s move as the market remains tentative about the EU plan,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “The three-year auction should be reasonably well-absorbed.” The yield on the benchmark 10-year note dropped 5 basis points to 3.49 percent as of 8:05 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due February 2020 rose 14/32, or $4.38 per $1,000 face amount, to 101 5/32. The yield increased 12 basis points yesterday, the most since March 24, after European officials announced the loan package for debt-strapped nations such as Greece and Portugal and the European Central Bank said it will buy bonds to shore up the region’s debt. Euro, Stocks The euro weakened 0.3 percent to $1.2745, more than erasing yesterday’s gains. The MSCI World Index of shares fell 0.7 percent and Standard & Poor’s 500 Index futures dropped 0.9 percent. “The crisis is hardly over,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients. Lending between banks has faltered as the debt crisis has deepened. The Libor-OIS spread, a gauge of the reluctance of banks to offer loans that measures the difference between the three-month London interbank offered rate and the overnight indexed swap rate, widened to 19 basis points yesterday, the most since August. The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, was unchanged at 27.2 basis points today, almost triple this year’s low set in March. ‘Important Step’ European countries saddled with debt should focus on cutting deficits in the wake of policy makers’ unprecedented efforts to contain the region’s sovereign-debt crisis, according to John Lipsky, the first deputy director at the International Monetary Fund. The rescue package “is an important step,” Lipsky said in an interview with Bloomberg Television. “Now let’s see what happens in other countries that need to undertake adjustment programs.” Concern that European governments weren’t moving fast enough to support their currency sent Treasuries surging last week as investors sought the safest securities. Ten-year yields fell to this year’s low of 3.26 percent on May 6. The Dow Jones Industrial Average plunged almost 1,000 points that day, before trimming losses later in the session. Morgan Stanley, the most bearish interest-rate forecaster of all the 18 primary dealers that trade with the Federal Reserve, reduced its year-end estimate for the yield on Treasury 10-year notes yesterday to 4.5 percent from 5.5 percent. ‘Reset the Clock’ “On the domestic front, things have gotten a lot better, but the U.S. rates story is more than a U.S. story, given the intensity of the sovereign crisis,” Richard Berner, co-head of global economics in New York, said yesterday. “Higher real rates due to massive borrowing needs and increasing private credit demand will still be the case. What has happened in the sovereign debt space has reset the clock for risk assets globally.” The 10-year note yield has dropped this year from as high as 4.01 percent on April 5. The three-year notes scheduled for sale today yielded 1.37 percent in pre-auction trading, declining from 1.776 percent at the previous sale of the securities on April 6. Investors bid for 3.10 times the amount of debt on offer last month, versus an average of 2.96 for the past 10 sales. Indirect bidders, a group that includes foreign central banks, bought 52.2 percent of the debt, versus the 10-sale average of 54.2 percent. Today’s auction is $2 billion smaller than last month’s auction, the first reduction since before credit markets froze in 2007, prompting a surge in government borrowing. The Treasury said May 5 that economic growth is leading to larger tax receipts and the size of any further cuts will depend on the strength of the recovery. President Barack Obama has increased the U.S. marketable debt to a record $7.9 trillion as he tries to sustain economic growth. Three-year notes have returned 1.9 percent this year, versus 3.8 percent for 10-year securities, according to Bank of America Merrill Lynch indexes. German government bonds returned 4.3 percent on average, as investors sought the relative safety of high-rated government bonds while European officials struggled to prevent a debt crisis in Greece from spreading. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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