Treasuries declined for a second day as a report showed U.S. services industries expanded at the fastest pace in a year, damping demand for the safety of U.S. government securities.
Benchmark 10-year yields rose as risk appetite climbed after China vowed to maintain its growth target and euro-area manufacturing and services shrank less than forecast. The yields touched a five-week low yesterday. The Dow Jones Industrial Average (INDU) rose to a record high today. Data on March 8 will show U.S. employers added 160,000 jobs last month after an increase of 157,000 in January, a Bloomberg News survey forecast.
Yields rose “in reaction to the data,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “With these low rates, with any extra cash in the system investors are looking for risky assets.”
Ten-year yields increased two basis points, or 0.02 percentage point, to 1.9 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. They reached 1.91 percent, the first time in three days above their 50-day moving average of 1.9 percent, after touching 1.83 percent yesterday, the lowest level since Jan. 24. The price of the 2 percent note due in February 2023 fell 6/32, or $1.88 per $1,000 face amount, to 100 29/32.
Thirty-year yields added two basis points to 3.11 percent.
Trading volume rose to $206 billion, from yesterday’s $183 billion, the lowest level this year, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Average daily Treasuries volume for the past year was $247 billion.
Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index fell to 53.9 basis points yesterday, the lowest level since Jan. 23. The gauge, which tracks the outlook for swings in U.S. government debt rates, has averaged 66.6 basis points over the past year.
The Institute for Supply Management’s index of U.S. non- manufacturing businesses, which covers about 90 percent of the economy, rose to 56 in February from the prior month’s 55.2, the Tempe, Arizona-based group said today. The median forecast of 73 economists surveyed by Bloomberg was 55. Readings above 50 signal expansion.
The data followed an ISM report on March 1 that showed U.S. manufacturing grew last month at the fastest since June 2011.
The Fed purchased $3.34 billion of Treasuries today due from May 2020 to February 2023. It will buy as much as $5.5 billion of Treasuries in two more operations this week, according to a schedule on the New York Fed’s website. The acquisitions are part of its purchases of $85 billion a month of Treasury and mortgage debt under the quantitative easing strategy to support the economy.
Treasuries climbed last week as haven demand grew amid European turmoil after elections in Italy failed to produce a clear winner, spurring bets the region’s debt crisis will worsen. The 10-year yield slid 12 basis points, the biggest drop since the five days ended Aug. 31.
“The market has been pretty overbought,” said Tom Tucci, managing director and head of Treasury trading in New York at Canadian Imperial Bank of Commerce’s CIBC World Markets unit. “It’s no surprise you’ll see some kind of take-back in here. I don’t think anyone will take any major risk until the payroll number on Friday.”
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.56 percentage points, up one basis point from yesterday, versus an average of 2.2 percentage points over the past decade.
The Dow Jones Industrial Average climbed, erasing losses from the financial crisis after a four-year rally fueled by the fastest profit growth since the 1990s and monetary stimulus from the central bank.
“What’s driving both stocks and bonds is the fact that the Fed has manipulated the market, and as long as they’re doing QE, bonds can’t really fall that far and stocks can just go much higher,” said Thomas di Galoma, a managing director at Navigate Advisors, a brokerage for institutional investors in Stamford, Connecticut.
Policy makers’ signals that they’re not about to close the door on stimulus may limit increases in Treasury yields.
Fed Vice Chairman Janet Yellen said in a speech yesterday the central bank should continue its monthly bond buying while tracking the costs of the program. Chairman Ben S. Bernanke last week defended the Fed’s bond purchases and low interest rate, saying the benefits of reducing borrowing costs and fueling growth outweigh any potential costs.
The Fed has kept its benchmark target for overnight lending between banks in a range of zero to 0.25 percent since 2008.
The Treasury 10-year yield may rise “significantly” above Societe Generale SA’s 2.75 percent year-end forecast if the economy shows marked improvement “and the Fed signals an end to extreme policy accommodation,” researchers Patrick Legland, Stephen Gallagher and Aneta Markowska wrote in a note to clients. The firm is a primary dealer.
The median forecast of 68 economists in a Bloomberg survey is for the 10-year yield to rise to 2.25 percent by year-end.
Treasuries declined earlier as London-based Markit Economics said a composite gauge of euro-area services and manufacturing output fell to 47.9 in February, above an initial estimate of 47.3, from 48.6 in January.
China maintained its economic-growth target at 7.5 percent for 2013. The budget deficit will rise by 50 percent as spending increases to “maintain support for economic growth,” Premier Wen Jiabao reported to the National People’s Congress in Beijing.
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