Treasuries fell for a second day amid speculation governments in Europe may guarantee Greek bonds to make it easier for the European Central Bank to accept a default on the debt, damping U.S. bonds’ refuge appeal. Ten-year notes briefly erased an earlier decline on bets European officials at a summit in Brussels might be no closer to an agreement to stem the region’s debt crisis. Initial jobless claims increased more than forecast last week. The Treasury will auction $13 billion of 10-year inflation-protected securities today and announce the sizes of three note sales due next week. “The market is saying it’s optimistic a deal will get done,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “For today, we will be trading off of what’s going on in Europe.” Yields on benchmark 10-year notes increased four basis points, or 0.04 percentage point, to 2.97 percent at 9:21 a.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.98 percent, the highest level since July 15. The 3.125 percent securities maturing in May 2021 dropped 11/32, or $3.44 per $1,000 face amount, to 101 10/32. Thirty-year bond yields advanced five basis points to 4.31 percent. The euro strengthened to $1.4330, the highest level in almost two weeks, and global stocks rose, with the MSCI World Index gaining 0.5 percent. Short as Possible European policy makers would aim to keep any period of default as short as possible, said an EU government official, who spoke on condition of anonymity because deliberations before today’s summit were confidential. The bonds could be backed up by top-rated securities sold by the European Financial Stability Facility, a national central-bank official said. No decisions have been taken and an ECB spokesman declined to comment. The proposal signals that leaders may find a way for the ECB to accept a default and sign up to a new package for Greece, which is a key step in stopping Europe’s debt crisis spreading to Italy and Spain. Treasuries remained lower even after Labor Department data showed applications for unemployment benefits increased 10,000 in the week ended July 16 to 418,000. Economists forecast 410,000 claims, according to the median estimate in a Bloomberg News survey. U.S. Debt Ceiling President Barack Obama’s administration signaled it may accept a short-term increase in the U.S. borrowing ceiling, adding to speculation the limit will be raised. Treasury Secretary Timothy F. Geithner has said the U.S. will be unable to service its debt from Aug. 2. The administration indicated yesterday it would accept a short-term increase only if lawmakers need a few days to finish work on a broader agreement to cut the deficit. “The latest bets coming out of the U.S. are positive on the ceiling,” said Rob da Silva, fund manager at Principal Global Investors in Sydney. “Treasuries are reacting to that.” The company is part of Principal Financial Group Inc., a life insurer based in Des Moines, Iowa. The U.S. will sell $35 billion of two-year securities on July 26, the same amount of five-year notes on the following day and $29 billion of seven-year debt on July 28, Wrightson ICAP LLC forecast. The amounts would be the same as the last time the U.S. auctioned these maturities in June, according to Wrightson, which is based in Jersey City, New Jersey, and specializes in government finance. Ten-year U.S. Treasury Inflation Protected Securities, or TIPS, yielded 0.553 percent today, compared with 0.887 percent at the last auction of the securities May 19. May Auction Investors bid for 2.66 times the amount of debt offered in May, versus the average of 2.83 for the past 10 auctions. Indirect bidders, the investor class that includes foreign central banks, bought 40.7 percent of the securities, versus the 10-sale average of 43.2 percent. The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.33 percentage points, compared with 1.71 percentage points a year ago. 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

Source