Treasuries fell, pushing the 10-year note yield to the highest since May, as economic data showed strength, dimming prospects for added monetary stimulus and limiting demand for $72 billion of U.S. debt sold at auctions.
The benchmark notes declined for a third straight week, the longest stretch since February, as European finance officials took a pause from recent negotiations to contain the region’s sovereign-debt crisis. Bond yields showed inflation expectations rose to the highest in almost four months as retail sales were forecast to have gained 0.3 percent in July, halting a three- month string of declines, before a report Aug. 14.
“It’s a response to slightly improving economic data, but more so, it’s a response to a slight slowdown in the bad news that’s coming out of Europe,” said Aaron Kohli, an interest- rate strategist BNP Paribas SA in New York, one of the 21 primary dealers that trade with the Federal Reserve. “The U.S. is muddling through, even if things aren’t as rosy as we’d like them to be.”
The 10-year note yield rose nine basis points this week, or 0.09 percentage point, to 1.66 percent, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 traded at 99 22/32.
The yield reached 1.73 percent on Aug. 9, the highest level since May 30. It had touched 1.38 percent on July 25, the lowest ever. The 30-year yield increased 11 basis points to 2.75 percent after touching an all-time low of 2.44 percent on July 26.
The 10-year yield surpassed the level of U.S. consumer- price increases. U.S. consumer-price inflation slowed to 1.5 percent in July from a year earlier, versus June’s 1.7 percent reading, according to a Bloomberg survey before the Labor Department report on Aug. 15.
The figure would translate into a real yield of 17 basis points, based on today’s 10-year rate. It was negative 2.11 percentage points in October.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, was 2.27 percentage points yesterday. It reached 2.29 percentage points on Aug. 7, the highest since April 17. The average during the past decade is 2.16 percentage points.
Hedge-fund managers and other large speculators reversed to a net-short position from a net-long position in 10-year note futures in the week ending Aug. 7, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 14,595 contracts on the Chicago Board of Trade. Last week, traders were net-long 2,055 contracts.
U.S. government securities have returned 1.9 percent this year as of Aug. 9, versus 7.7 percent for an index of investment-grade and high-yield company debt, according to Bank of America Merrill Lynch data. The MSCI All-Country World Index (MXWD) of stocks handed investors a 10 percent gain including reinvested dividends, according to data compiled by Bloomberg.
Demand waned at sales of Treasury three-, 10- and 30-year securities this week. The 10-year auction on Aug. 8 drew bids for 2.49 times the amount of debt available, the least since August 2009, dropping from 3.61 at the prior sale on July 11.
“There was generally more positive data,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, a primary dealer. “The market was also dealing with supply, and so a concession was built in for there.”
The U.S. government’s budget deficit narrowed as spending dropped by 11.9 percent from a year earlier and some payments were accelerated to the previous month for calendar-related reasons. The deficit through July for the 2012 fiscal year, which ends Sept. 30, is $973.8 billion compared with $1.1 trillion at this point last year and the lowest for July since 2008.
The gap for July shrank 46 percent to $69.6 billion from a $129.4 billion shortfall in July 2011, the Treasury Department said yesterday in Washington. Last month’s gap was smaller than the projected $90 billion deficit, according to the median estimate in a Bloomberg News survey. For the first 10 months of this fiscal year the deficit was 11.5 percent narrower than in the year-earlier period.
The U.S. central bank has held interest rates near zero since 2008 and plans to keep them there through 2014 to stimulate the world’s biggest economy. The Fed has also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE.
The economy added 163,000 jobs in July, a government report showed Aug. 3, more than the 100,000 projected by economists. Initial claims for unemployment insurance unexpectedly dropped by 6,000 to 361,000 last week, a report showed Aug. 9.
Retail sales rose 0.3 percent in July, according to the median forecast of 45 economists in a Bloomberg News survey before the Commerce Department report in Washington. The three months of declines in the prior months was the longest such streak since the period from July through December of 2008.
“Retail sales will be key as to giving the market short- term confirmation as to whether QE probability is more or less,” said Shyam Rajan, an interest-rate strategist at Bank of America Corp. in New York, a primary dealer. “Our view is the data will remain weak through August and September and the Fed will launch QE.”
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