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Treasuries Drop Second Day Before $35 Billion Five-Year Auction

Treasuries dropped for a second day as the U.S. prepares to sell $35 billion in five-year notes amid speculation the Federal Reserve may reduce its purchases of government securities this year.

Shorter-maturity notes slid as sales of new U.S. homes rose more than forecast in June to the highest level in five years, a sign builders are benefiting from a lack of supply of existing properties. Benchmark 10-year note yields rose earlier to the highest level in a week after gauges of euro-area services and manufacturing beat analyst estimates. The U.S. is selling $99 billion in notes this week.

“There’s been good data out of Europe this morning, which started this, and you’ve got the auction coming up -- that’s what’s weighing on the market,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The yield levels will probably attract buyers.”

Ten-year yields rose seven basis points, or 0.07 percentage point, to 2.57 percent at 10:27 a.m. New York time, after gaining as much as nine basis points, the biggest increase in almost three weeks, Bloomberg Bond Trader data showed. The 1.75 percent note due May 2023 dropped 1/2, or $5 per $1,000 face amount, to 92 29/32.

Yields on the 10-year note rose to 2.75 percent on July 8, the highest since August 2011, from a 2013 low of 1.61 percent on May 1. They remain below the five-year average of 2.73 percent.

Volume Drops

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $247.6 billion yesterday, below the average of $274.2 billion in July.

Treasuries are little changed this month, Bloomberg World Bond Indexes show, after falling 1.4 percent in June on concern the Fed was moving closer to reducing the pace of its bond-buying program.

A manufacturing index based on a survey of euro-area purchasing managers rose to 50.1 in July from 48.8 in June, London-based Markit Economics said today. Analysts in a Bloomberg survey predicted a reading of 49.1. A level of 50 is the dividing line between expansion and contraction. A report on services gave a reading of 49.6, versus analyst estimates for 48.7.

“We’re backing up a bit on the European purchasing managers index (SPX) numbers,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of the Fed’s 21 primary dealers that trade government securities with the central bank. He also cited low volume. “It’s summer trading -- flows have been very light.”

Home Sales

U.S. new-home sales climbed 8.3 percent to an annualized pace of 497,000 homes, highest level since May 2008, the Commerce Department said in Washington. The median estimate of 77 economists surveyed by Bloomberg called for a gain to 484,000.

The Standard & Poor’s 500 Index of U.S. stocks traded near an all-time high as Apple Inc.’s profit topped estimates and forecasts from Boeing Co. and Ford Motor Co. exceeded predictions.

“Great earnings out of Apple and Ford” have added to selling pressure, said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It’s just another sign that things are going well, and that will reverberate through the economy. There’s consumer demand for good products.”

Fed Buying

The Fed will start trimming its $85 billion in monthly bond purchases in September, according to a survey of economists by Bloomberg News.

In its first reduction, the Federal Open Market Committee will probably cut monthly bond buying to $65 billion, according to the July 18-22 survey of 54 economists. Economists project purchases divided between $35 billion in Treasuries and $30 billion in mortgage-backed securities.

The five-year notes being auctioned today yielded 1.4 percent, versus an yield of 1.484 percent at the last sale of the securities on June 26, the highest since July 2011.

Investors bid for 2.45 times the amount of debt offered last month, the lowest level since September 2009.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 3.6 percent of the securities, the smallest amount since November 2009.

Indirect bidders, the investor class that includes foreign central banks, purchased 53 percent of the notes, the most since January 2010.

At a $35 billion two-year auction yesterday, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.08, compared with an average of 3.54 for the prior 10 sales.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 74.05 yesterday, falling from this month’s high of 117.89 on July 5. The one-year average is 64.76.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

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