Treasuries Post Weekly Drop as Data Suggest Momentum

(Corrects percentage point amount in fourth paragraph of a story that originally ran on Feb. 15.)

Treasuries dropped after reports showing increases in manufacturing in the New York region and consumer confidence added to optimism the U.S. economy is gaining momentum.

Yields on benchmark 10-year bonds climbed above 2 percent after the Federal Reserve Bank of New York’s general economic index unexpectedly increased to 10, the highest since May 2012. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to a three-month high.

“The data suggests the recovery, while not in acceleration mode, continues to edge along,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The yield on the 10-year note rose one basis point, or 0.01 percentage point, to 2 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. It rose five basis points on the week. The 2 percent note due February 2023 fell 1/32, or 31 cents per $1,000 face amount, to 99 31/32.

The University of Michigan index of consumer sentiment advanced to 76.3 in February from 73.8 the prior month. Economists in a Bloomberg poll forecast a rise to 74.8.

“It’s another piece of reasonably good data,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed.

Speculative Positions

Hedge-fund managers and other large speculators increased bets 10-year note futures will gain in the week ending Feb. 12, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 51,549 contracts on the Chicago Board of Trade. Net-long positions rose by 4,643 contracts, from a week earlier, the CFTC’s Commitments of Traders report showed.

Short positions on 30-year bond futures were reduced. Net short positions outnumbered long positions by 23,679 contracts, falling by 5,226 contracts, the data showed.

Even with the evidence of economic growth and renewed investor optimism, investors continue to buy U.S. government debt as a refuge against a renewal of turmoil in global financial markets and concern the U.S. recovery may falter.

“Anytime you get to 2.06, there seem to be decent buying despite the overwhelming bearishness that seems to be confronting the marketplace,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut.

International Demand

China remained the biggest foreign owner of Treasuries in December after its holdings rose $19.7 billion to $1.2 trillion, according to the Treasury data released today. The holdings of Japan, the second-largest, rose $2.5 billion to $1.12 trillion.

Foreigners bought a net $29.9 billion of Treasuries in December, according to today’s report, up from $26.4 billion the month before.

Treasuries have lost 0.9 percent this year, according to an index compiled by Bank of America Merrill Lynch. The Standard & Poor’s 500 Index of shares has gained 7 percent this year, including reinvested dividends.

Ten-year yields will climb to 2.33 percent in the fourth quarter, according to analyst estimates compiled by Bloomberg. Should they turn out to be correct, investors who buy the securities today would lose 1.1 percent by the year-end.

The Fed said on Dec. 12 that interest rates will remain near zero “at least as long as” the unemployment rate stays above 6.5 percent and inflation “between one and two years ahead” is projected to be no more than 2.5 percent. Government figures showed this month that the jobless rate was 7.9 percent in January.

Monthly Purchases

Federal Reserve Bank of Cleveland President Sandra Pianalto said the gains from the Fed’s $85 billion in monthly bond purchase may fade.

“Given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past,” Pianalto said today in a speech at Florida Gulf Coast University in Fort Myers, Florida. “It is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.”

Fed Bank of St. Louis President James Bullard yesterday said a growing balance sheet could be complicated to unwind.

The Fed is scheduled on Feb. 19 to buy as much as $1.75 billion of Treasuries maturing between February 2036 and February 2043, the Fed Bank of New York’s website showed. U.S. financial markets are closed Feb. 18 for Presidents’ Day.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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