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Treasuries Drop for Third Day on Ukraine-Russia Cease-Fire Talks

Sept. 3 (Bloomberg) -- Treasury 10-year notes declined for a third day, pushing yields to the highest in three weeks, as talks on a cease-fire in the east of Ukraine damped demand for the safest assets.

The securities extended their drop from yesterday, when data showed U.S. manufacturing expanded at the fastest pace in three years. The drop also comes before data Friday that economists said will show employers added more than 200,000 jobs for a seventh month in August. The Ukraine crisis and the prospect of the European Central Bank adopting further stimulus have capped bond yields even as the economic outlook in the U.S. brightened.

“Ukraine has added to the move from yesterday, and maybe this movement can go a bit further,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “For the markets, most important will be the ECB and the economy in the U.S. I suspect the Ukrainian affair will move to the background.”

The U.S. 10-year yield increased three basis points, or 0.03 percentage point, to 2.45 percent at 7:15 a.m. in New York, according to Bloomberg Bond Trader data. The 2.375 percent note maturing in August 2024 fell 1/4, or $2.50 per $1,000 face amount, to 99 11/32. The yield reached 2.47 percent earlier, the highest since Aug. 13.

Manufacturing Surge

U.S. 10-year yields climbed eight basis points yesterday, the biggest increase since July 30, after the Institute for Supply Management’s factory index unexpectedly rose to the highest level since March 2011.

Lammens said he recommends investors avoid buying Treasuries before the 10-year yield rises to 2.50 percent.

U.S. government bonds returned 1.3 percent in August, the most since January, according to Bloomberg World Bond Indexes.

Demand for the relative safety of Treasuries increased in recent months as the conflict in Ukraine intensified, the U.S. bombed Islamic State positions in Iraq and Israel bombarded Gaza, before agreeing to a truce.

Russian President Vladimir Putin and his Ukrainian counterpart Petro Poroshenko largely agreed on steps to a cease- fire today, Putin’s spokesman said, denying Ukraine’s assertion that the leaders reached agreement on a truce.

Draghi Effect

In Europe, bond yields are near records after ECB President Mario Draghi said last month inflation expectations have deteriorated across the euro area and signaled policy makers are ready to do more to boost prices. German 10-year yields fell to an all-time low 0.866 percent last week and France’s declined to 1.217 percent. ECB policy makers are scheduled to decide on monetary policy tomorrow.

Data last week showed the U.S. economy expanded at a 4.2 percent annualized pace in the second quarter after shrinking 2.1 percent in the first three months of the year. The Fed has reduced its monthly purchases of government and mortgage debt to $25 billion from $85 billion, and is on course to end the program this year.

“The fundamentals tell us that Treasury yields should be higher,” said Will Tseng, a bond-fund manager in Taipei at Mirae Asset Global Investments Co., which has $57.5 billion in assets. “When the Ukraine crisis gets better or the ECB announces what it’s going to do, then the things dragging Treasury yields down will disappear.”

Tseng said he prefers emerging-market corporate bonds and, to a lesser extent, emerging sovereign debt instead of Treasuries or European fixed-income securities. He’s invested in countries including Mexico and Brazil for their higher yields, he said.

Analysts forecast 10-year Treasury rates will climb to 2.92 percent by Dec. 31, based on a Bloomberg survey of banks and securities companies with the most recent predictions given the heaviest weightings.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord

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