Treasury 30-year bond yields touched the lowest level in morethan a week before the Federal Reserve opens a two-day policymeeting amid speculation on whether it will take further steps toboost economic growth.

Long bonds briefly erased gains after the Fed bought $1.92billion of long-term U.S. securities. Treasuries erased earlylosses amid concern European leaders will struggle to stem theirdebt crisis even after pro-bailout parties in Greece won enoughvotes to form a government. Spanish bond yields climbed to morethan 7 percent for the first time in the euro era.

“The market shrugged off the good news from Europe and continuesto consolidate around these levels,” said Jason Rogan, director ofU.S. government trading at Guggenheim Partners LLC, a NewYork-based brokerage for institutional investors. “A lot of peopleare waiting for the Fed, as there are still tons of questions, anda lot of people are waiting on the sidelines to see whathappens.”

The 30-year bond yield declined two basis points, or 0.02percentage point, to 2.67 percent at 4:02 p.m. New York time,according to Bloomberg Bond Trader data. It touched 2.65 percentearlier, the lowest level since June 6, after rising as much aseight basis points to 2.76 percent. The yield dropped on June 1 toa record low 2.51 percent.

Ten-year note yields were little changed at 1.58 percent afterfalling earlier to 1.56 percent. They fell on June 1 to 1.44percent, a record.

'We Drift'

“All eyes are on Europe and the Fed,” said Thomas Simons, agovernment-debt economist in New York at the primary dealerJefferies Group Inc. “There is a ton of stuff that is supposed tohappen later in the week, but until then we drift. It's not advisedto put on any position in any direction given the amount ofuncertainty out there.”

The Fed bought Treasuries today due from February 2037 toNovember 2041 as part of its Operation Twist program to replace$400 billion of short-term debt in its portfolio with longer- termTreasuries in an effort to lower borrowing costs.

The central bank sold $8.6 billion of Treasuries earlier duefrom May 2013 to November 2013.

As the U.S. recovery slows and the central bank's efforts toboost growth expire, there's no consensus among the biggest bonddealers that the central bank will begin a fourth round of economicstimulus with consumer and corporate borrowing costs already atrecord lows.

Stimulus Bets

Signs of faltering growth amid European debt turmoil, combinedwith inflation below the central bank's 2 percent target, mean theFed will announce new steps to boost the economy as soon as thisweek, according to 12 of the 21 primary dealers. The rest don'texpect action and some say yields near all-time lows limit theeffectiveness of more measures by policy makers.

The Fed kept the economy growing for nine straight quarters bypumping $2.3 trillion into the financial system in two rounds of atactic called quantitative easing, and by shifting $400 billioninto longer-term debt. Bank of America Merrill Lynch bond indexesshow yields on corporate bonds have fallen to 3.44 percent frommore than 8 percent in early 2009.

Royal Bank of Scotland Group Plc's RBS Securities unit, aprimary dealer, forecasts a 60 percent likelihood of additional Fedstimulus through more buying of longer-maturity issues oradditional asset purchases.

Further action might have “diminishing impact, but if theimpact's diminishing, that doesn't mean they shouldn't do it,” saidJohn Briggs, a U.S. government bond strategist at RBS in Stamford,Connecticut.

Inflation Outlook

The yield gap between 10-year notes and Treasury InflationProtected Securities, or TIPS, which signals traders' outlook forthe rate of inflation over the life of the debt, touched 2.10percentage points. It reached a 2012 low of 1.9 percentage pointson Jan. 3 and a high of 2.45 percentage points March 20. Thefive-year average is 2.02 percentage points.

A valuation measure showed U.S. 10-year notes are at almost themost expensive levels ever. The term premium, a model created byeconomists at the Fed, was at negative 0.89 percent, after reachinga record of negative 0.94 percent on June 1. The average over thepast year is negative 0.48 percent. A negative reading indicatesinvestors are willing to accept yields below what's considered fairvalue.

Greek Election

Antonis Samaras, leader of Greece's New Democracy party, said hewill work with pro-European parties to form a national salvationgovernment. Samaras, whose party came first in June 17 elections,spoke at the start of a meeting with President Karolos Papoulias,where he received a three-day mandate to form a government.

Group of 20 nations chiefs began a two-day meeting in Mexicotoday as Spanish borrowing costs soared to a euro-era record.Spain's 10-year yield climbed as much as 41 basis points to 7.29percent, while the euro weakened 0.6 percent to $1.2564 afterstrengthening earlier to $1.2748.

German 10-year bund yields fell two basis points to 1.41percent, reversing an earlier increase. They touched a record low1.13 percent on June 1. U.K. 10-year bonds were little changed at1.66 percent, after reaching 1.44 percent on June 1.

The U.S. and U.K. are the “cleanest dirty shirts” for bondinvestors, according to Bill Gross, who runs the world's largestbond mutual fund at Pacific Investment Management Co.

Gross said Germany is in a bond-market bubble, as the country issaddled with rising liabilities from the region's debt crisis. Hespoke in an interview on Bloomberg Television's “Market Makers”with Erik Schatzker and Stephanie Ruhle.

Bloomberg News

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