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Treasuries Gain Pushes Yield to Two-Month Low on Ukraine Tension

Aug. 6 (Bloomberg) -- Treasuries advanced, pushing 10-year yields to the least since May, as concern that tensions between Russia and Western nations over Ukraine are escalating boosted investor demand for haven assets.

Thirty-year bond yields fell for a second day. European stocks dropped to the lowest since April after Polish Prime Minister Donald Tusk said his nation had “reason to believe” the risk of a Russian incursion into Ukraine is “greater than a few days ago.” Treasuries rose even after data yesterday showed services industries grew in July at the fastest since 2005. The U.S. said it will sell $67 billion of notes and bonds next week.

“There is clearly a risk-off move,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “It’s mostly the stories about Ukraine and Russia. There is a little bit of stress everywhere in the global markets and this is benefiting Treasuries despite the strong data we had yesterday in the U.S.”

The benchmark 10-year yield dropped five basis points, or 0.05 percentage point, to 2.44 percent at 8:33 a.m. New York time, according to Bloomberg Bond Trader data. The 2.5 percent note maturing in May 2024 rose 13/32, or $4.06 per $1,000 face amount, to 100 17/32. The yield slid earlier to 2.43 percent, the least since May 29.

The 30-year bond yield declined five basis points to 3.24 percent after falling to 3.22 percent on July 29, the least since June 7, 2013.

U.S. Auctions

The U.S. will auction $67 billion in notes and bonds next week, the Treasury announced. It will sell $27 billion of three- year notes, $24 billion of 10-year debt and $16 billion of 30- year bonds on three consecutive days starting Aug. 12.

The Stoxx Europe 600 Index dropped 1.3 percent.

There’s a risk of Russia sending troops into Ukraine under the “pretext” of a humanitarian or peacekeeping mission after President Vladimir Putin massed soldiers on his country’s western border, NATO said. “The latest Russian military buildup further escalates the situation and undermines efforts aimed at finding a diplomatic solution to the crisis. This is a dangerous situation,” Oana Lungescu, a spokeswoman for the North Atlantic Treaty Organization, said by e-mail today.

Treasuries also rose today with their German counterparts as a report showed Italy’s economy unexpectedly contracted in the second quarter, boosting demand for havens. Germany’s 10- year bund yield fell to a record 1.10 percent today after data showed factory orders in Europe’s largest economy dropped the most in more than 2 1/2 years in June.

Treasury Prospects

“The geopolitical risk leads to losses in the equity market,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “The prospects for Treasuries are good, especially as the U.S. data are mixed.”

The Bloomberg U.S. Treasury Bond Index has gained 3.6 percent this year through yesterday, recouping 2013’s decline.

Federal Reserve Bank of Dallas President Richard Fisher, who has been arguing the central bank should raise interest rates as soon as this year, said his fellow policy makers are coming around to his view.

If the economy continues to improve, the Fed will have to “move the date of lift-off further forward,” as it prepares to increase borrowing costs, Fisher said yesterday on Fox Business Network. He votes on monetary policy this year.

Fed funds futures contracts show about a 72 percent probability the central bank will increase its benchmark to 0.5 percent or more by September 2015.

To contact the reporters on this story: Eshe Nelson in London at enelson32@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey, Keith Jenkins

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