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Treasuries Fall as German Confidence Rises Before U.S. Auctions

Dec. 11 (Bloomberg) -- Treasuries fell, with 10-year yields climbing to the highest level in a week, as a German report showing investor confidence jumped in December damped demand for the safest securities.

Longer maturities led declines as the U.S. prepared to sell $66 billion of debt this week, starting with $32 billion of three-year notes today. Treasury break-even rates indicate inflation expectations are approaching the highest level in a month before Federal Reserve policy makers start a two-day meeting today to discuss measures to support the U.S. economy.

The German data was “a pretty strong number and added to the negative tone” for Treasuries, said Craig Collins, managing director of rates trading at Bank of Montreal in London. “That was enough to push the market down, testing support and once we breached it that brought in another round of selling.” Support refers to a level where buy orders may be clustered.

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.64 percent at 8:10 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 fell 6/32, or $1.88 per $1,000 face amount, to 99 29/32. The yield is the highest since Dec. 3.

The ZEW Center for European Economic Research said its index of German investor and analyst expectations, which aims to predict economic developments six months in advance, climbed to 6.9 this month from minus 15.7 in November. ZEW’s gauge of the current economic situation rose to 5.7 from 5.4.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities widened one basis point to 2.50 percentage points. The gap, which measures investor expectations for inflation over the life of the securities, expanded to 2.51 percentage points on Dec. 7, the most since Nov. 7.

Debt Sale

The three-year notes to be sold today yielded 0.33 percent in pre-auction trading, compared with a yield of 0.392 percent at the previous sale of the maturity on Nov. 6.

Investors bid for 3.41 times the amount of debt available last month, down from 3.96 times on Oct. 9. Primary dealers bought 52.7 percent of the securities, the most in three months.

“Three-year notes are at expensive, historically rich levels,” Bank of Montreal’s Collins said. “This little back up in yields we’ve had will probably help the auction go even better.”

The Treasury is also scheduled to auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year debt Dec. 13.

Fed Meeting

Dealers that trade with the Fed predict the central bank will announce a plan to buy as much as $45 billion of government debt a month at this week’s meeting, Bloomberg News surveys showed. Chairman Ben S. Bernanke unveiled a plan in September to buy $40 billion of mortgage debt each month.

“The market is still expecting something” from the Fed, said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “When we maybe look at things like the labor market and other measures we don’t really see a substantial improvement so these further easing fantasies are there and keep break-even rates very well underpinned.”

A program known as Operation Twist, in which the Fed sells shorter-maturity Treasuries and buys longer-dated debt, is due to expire this year. As part of the plan, the central bank will today purchase as much as $1.5 billion of inflation-linked securities maturing from January 2019 to February 2042.

The most likely scenario for additional fund provision “is for the Fed simply to suspend the front-end sales and keep the existing Twist purchases unchanged in size and maturity sectors,” Deutsche Bank AG analysts, including Dominic Konstam, head of interest-rate strategy in New York, wrote in a research note on Dec. 7. “In this case, Treasuries would rally.”

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