Treasuries dropped, pushing 10-year note yields up from the lowest level since January 2009, on speculation the Federal Reserve may introduce today new stimulus measures to boost financial confidence. Three-year notes decreased before the U.S. government’s $32 billion auction of the debt. Treasuries pared their decline as European stocks fell after yesterday’s rally in Treasuries and rout in equities prompted by Standard & Poor’s cut in America’s top credit rating. “There’s a lot of speculation about the possibility of more easing from the Fed,” said Philip Marey, a senior U.S. strategist at Rabobank Groep in Utrecht, Netherlands. “There’s a bit of a correction in Treasury yields after the fall we saw yesterday. They will use this meeting to try and calm the markets without pulling the trigger on more bond purchases. They will indicate that they are willing to launch more quantitative easing if the situation deteriorates.” Yields on 10-year notes climbed four basis points, or 0.04 percentage point, to 2.36 percent at 7:01 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 fell 11/32, or $3.44 per $1,000 face amount, to 106 5/8. Fed Chairman Ben S. Bernanke and fellow policy makers may extend a pledge following their meeting today to maintain record stimulus, according to economists at JPMorgan Chase & Co., BNP Paribas SA and Goldman Sachs Group Inc. Yesterday’s Bond Rally Treasuries surged yesterday as tumbling stock markets sparked demand for the safety of government debt. Standard & Poor’s cut the U.S. government’s AAA credit rating at the end of last week, though Moody’s Investors Service and Fitch Ratings have affirmed the U.S. at the top rating. The 10-year note yields dropped earlier today to 2.27 percent, the lowest level since January 2009. Three-year note yields increased two basis points to 0.44 percent. Yields on two-year notes were unchanged at 0.26 percent after falling yesterday to a record low 0.2283. Yields on 30-year bonds rose three basis points to 3.69 percent. The extra yield investors get for holding 30-year bonds instead of two-year notes fell to 3.42 percentage points, almost the narrowest on a closing basis since October 2010. The Stoxx Europe 600 Index tumbled 1.8 percent, erasing a gain in early trading. The pan-European equity benchmark has fallen for eight consecutive days in the longest losing streak since 2003. U.S. stock futures fell, indicating the S&P 500 Index will drop after its biggest loss since 2008. Treasury Volatility The Merrill Lynch Option Volatility Estimate, which gauges price swings in the Treasury market, surged yesterday to 117.80, the highest level since Dec. 17. The Fed may consider today the use of untested policy tools after two rounds of bond buying known as quantitative easing totaling $2.3 trillion. “The question is whether the market rout will continue or will there be a hint that the Fed is willing to help out,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “If we get some sense in the market that the Fed is going to step in, then the short-term reaction would be for a more risk-on stance, and that should help to limit the flight to safety.” By a 52 percent to 48 percent margin, respondents in a Bloomberg News survey said the Fed would ease policy this year through monetary tools or statement language. If the central bank acts, 59 percent said it would communicate that the federal funds rate, balance sheet or both will remain especially stimulative for a longer period or more specific amount of time. Fed’s Target Rate The Federal Open Market Committee will probably leave the fed funds target rate at zero to 0.25 percent today, according to the median forecast of 103 economists in a Bloomberg News survey. The rate has been in a range of zero to 0.25 percent since December 2008. “We expect the FOMC will acknowledge the recent deterioration of the economic data and some risks resulting from the recent downgrade of U.S. Treasury debt by S&P,” wrote analysts led by Ward McCarthy, chief financial economist at Jefferies Group Inc. in New York. “There is a possibility that the committee will provide guidance on balance sheet management going forward with the goal of lowering long-term rates.” Jefferies doesn’t expect the Fed to announce a third round of quantitative easing, the analysts wrote. The central bank ended $600 billion of bond-buying in June. The three-year notes scheduled for sale today yielded 0.470 percent in pre-auction trading, compared with 0.67 percent at the previous sale of the securities on July 12. Investors bid for 3.22 times the amount of available debt last month, compared with 3.28 times in June. Treasuries have returned 6.2 percent this year, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1.3 percent, while German bunds have returned 4.8 percent, the indexes show. To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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