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Treasuries Decline Most in Week as Stock Markets Gain on End of Yuan Peg

Treasuries fell the most in a week as China said it will allow a more flexible yuan, encouraging confidence in the global economic recovery and triggering gains in stock markets.

Longer-maturity bonds led declines after the People’s Bank of China indicated two days ago it’s abandoning the 6.83 yuan peg to the dollar adopted during the global financial crisis to protect exporters. The U.S. will sell $108 billion in two-, five- and seven-year notes this week.

“People anticipate the revaluation is going to cause a jump-start of jobs in the U.S., and that will make manufacturing easier,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “As they revalue the yuan, the dollar holdings are going to get weaker, so why would you add them?”

The yield on the 10-year note rose seven basis points, or 0.07 percentage point, to 3.29 percent at 8:54 a.m. in New York, according to BGCantor Market Data. It climbed earlier by 8.5 basis points, the most since June 14 on an intraday basis. The price of the 3.5 percent security maturing in May 2020 dropped 18/32, or $5.63 per $1,000 face amount, to 101 3/4.

The yield fell to 3.06 percent on May 25, the lowest level since April 2009, on concern Europe’s sovereign-debt crisis will slow global economic growth. The yield will reach 3.80 percent by the end of the year, according to the median of 62 estimates compiled by Bloomberg News.

Yield Gains

The 2-year note’s yield rose two basis points to 0.73 percent, while the 30-year bond’s yield gained seven basis points to 4.22 percent.

The Stoxx Europe 600 Index advanced 1.3 percent, while futures on the Standard & Poor’s 500 Index expiring in September gained 1.3 percent.

China’s central bank indicated two days ago that while there’s no basis for “large scale” moves in the currency, the exchange rate will be allowed increased “flexibility.” It ruled out yesterday “large changes” in the exchange rate and said it will prevent “excessive” moves.

“A stronger yuan will make China’s exports more expensive and is perceived to be inflationary, so Treasury yields are higher,” said Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., a brokerage firm.

China’s announcement will also hurt Treasuries because the Asian nation’s central bank will have fewer dollars to purchase the securities, according to UBS AG.

‘Slower Accumulation’

“Somewhat slower reserve accumulation will lead to slower accumulation of U.S. Treasuries,” analysts led by Mansoor Mohi- uddin, the global head of foreign-exchange strategy at UBS in Singapore, wrote in a report.

Spain sold 3.5 billion euros ($4.3 billion) of debt last week at yields below market value, easing concern it will need help to raise funds. Concern some European lenders may become insolvent receded after the European Union said it will publish results of bank stress tests.

Treasuries also declined before the U.S. government sells notes this week.

The Treasury will auction $40 billion in two-year debt tomorrow, $38 billion in five-year notes the following day and $30 billion in seven-year securities on June 24. The total is $5 billion less than last month’s sales of the same maturities.

Indirect bidders, an investor class that includes foreign central banks, bought 36 percent of the two-year notes at the prior auction on May 25, compared with an average of 42 percent over the past 10 sales.

Fed Rate View

Treasuries of all maturities are still headed for the best first half in a decade on speculation reduced inflationary pressure will prompt the Federal Reserve to keep interest rates near zero.

“Treasury yields will continue south,” said Akira Takei, a fund manager in Tokyo at Mizuho Financial Group Inc. “Inflation is not imminent, and in fact we should be more concerned about deflation. The Fed cannot raise rates any time soon.”

The consumer price index decreased 0.2 percent in May from the previous month, the biggest drop since December 2008, a Labor Department report showed on June 17.

U.S. policy makers will hold the benchmark interest rate at a record-low range of zero to 0.25 percent at the end of their two-day meeting on June 23, according to all economists in a Bloomberg News survey.

The central bank reiterated at the end of its April 28 meeting that it intended to keep its benchmark rate near zero for an “extended period” to help spur the recovery.

Futures on the CME Group Inc. exchange show a 26 percent chance the Fed will boost its target rate by at least a quarter- percentage point by its December meeting, compared with 37 percent odds a month ago.

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