Treasury 10-year yields slid to the lowest level this month as the euro-region debt crisis intensified and amid speculation data this week will show the U.S. economic recovery is slowing. U.S. two-year notes rose as European policy makers prepared to meet on how to contain the sovereign crisis. Federal funds futures contracts indicated traders pushed back forecasts for when the Federal Reserve will start raising interest rates until December 2012 after payrolls data last week showed job growth unexpectedly slowed. Italian 10-year government bond yields jumped to the highest level in nine years. “The Treasury market continues to grapple with the sovereign credit concerns in Europe as investors contemplate what happens when ‘too big to fail’ becomes ‘too big to bail,’” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The disappointing employment report has lowered people’s expectations of this stage of the recovery.” Ten-year note yields dropped seven basis points, or 0.07 percentage point, to 2.96 percent at 9:01 a.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.94 percent, the least since June 28. The 3.125 percent note due May 2021 rose 18/32, or $5.63 per $1,000 face amount, to 101 13/32. Two-year note yields fell two basis points to 0.38 percent. Thirty-day federal funds futures contracts for delivery in December next year yielded 0.45 percent, indicating investors expect the Fed will wait until then to raise rates. The yield has declined from 1 percent in May. Expanded Package The euro weakened for a second day after the German newspaper Die Welt reported yesterday the European Central Bank is seeking to expand an aid fund to include help for Italy. The 17-nation currency tumbled as much as 1.7 percent to $1.4026, a six-week low. Investor concern that the euro region may see its first sovereign default helped drive Treasuries to a 2.4 percent return in the second quarter, according to Bank of America Merrill Lynch data. Sales at U.S. retailers were flat in June, after declining 0.2 percent in May, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department report on July 14. A government report the following day will show the cost of living decreased for the first time in a year, according to a separate survey. Ten-year yields dropped 11 basis points on July 8 after the Labor Department said the U.S. added 18,000 jobs in June, compared with a Bloomberg survey forecast of 105,000, and the unemployment rate rose to 9.2 percent. U.S. Debt Limit President Barack Obama plans to hold a press conference at 11 a.m. in Washington today as he presses lawmakers to reach an agreement to raise the $14.3 trillion U.S. borrowing ceiling, a move the Treasury Department says is needed by Aug. 2 to avert a default on the nation’s financial obligations. Such an event “would be a shocker,” according to Andrew Bosomworth of Pacific Investment Management Co., the world’s largest bond fund manager. “A credit event on U.S. debt is not something the world is really geared toward having,” said Bosomworth, a Munich-based fund manager at Pimco. “Yields on U.S. Treasury bonds at present do not reflect the appropriate risks, be those inflation risks, be those risks of the government not coming to an agreement on the debt ceiling. We’re not buying those bonds.” He spoke in an interview on Bloomberg Television’s “Countdown” with Francine Lacqua and Owen Thomas. The U.S. plans to auction $32 billion of three-year notes tomorrow, $21 billion of 10-year debt on July 13 and $13 billion of 30-year bonds on July 14. The sizes are unchanged from the last time the U.S. auctioned these securities in June. ‘Disappointing’ Auctions “The auctions that took place a couple of weeks ago after QE2 were pretty disappointing,” said Credit Agricole’s Green, referring to the end on June 30 of the Fed’s $600 billion of Treasury purchases under a second round of quantitative easing. “There are fears about supply and demand imbalances where there’s probably too much supply and not enough demand now that the Fed is no longer around.” Investors became less bearish on their outlook for Treasuries through year-end, according to a survey of money managers by Ried Thunberg ICAP Inc., the New Jersey-based unit of the world’s largest interdealer broker. The company’s sentiment index climbed to 43 for the seven days ended July 8 from 41 the week before. A figure less than 50 indicates investors expect prices to fall. The Fed may keep interest rates at record lows for the longest period since World War II as the economic slowdown that sparked a four-month bond rally worsens, according to Treasury market signals. U.S. Growth The 3 percentage point gap between yields for three-month and 10-year Treasuries indicates the economy may grow 1.1 percent in the 12 months ending June 2012, a study by the Federal Reserve Bank of Cleveland says. That’s less than half the central bank’s current forecast, and may delay any rate increase from the zero-to-25 basis point range held since 2008. Slower expansion means the Fed is unlikely to tighten credit until June 2012, the longest static period since the government forced the central bank to buy Treasuries during the 1940s. Any spending cuts agreed by President Obama and Congress before the deadline to raise the debt limit may restrain the economy. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net; To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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