Treasuries fell, with 30-year bond yields rising to the highest in two years, after unemployment claims dropped and manufacturing quickened, stoking speculation the Federal Reserve has justification to reduce debt purchases.
Ten-year note yields have risen by the most in almost a month as investors anticipated quicker economic growth even as the Fed said yesterday the expansion has been “modest” and pledged to keep buying $85 billion of bonds a month. The U.S. unemployment rate dropped last month, according to the median forecast in a Bloomberg News survey of economists before tomorrow’s report.
“The data has been very impressive, and it’s pointing toward growth that will likely allow the Fed to start reducing its asset purchases,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at Treasury auctions. “There is optimism that tomorrow’s number will come in better than expected, and people would rather be short than long at this point.” A short position is a bet that an asset will decrease in value while a long is a wager on gains.
Benchmark U.S. 10-year yields rose 13 basis points, or 0.12 percentage point, to 2.71 percent at 5 p.m. New York time, Bloomberg Bond Trader data showed. The price of the 1.75 percent note due in May 2023 declined 1 2/32, or $10.31 per $1,000 face amount, to 91 26/32. The yield reached the highest level since July 8.
Thirty-year bond yields added 12 basis points to 3.75 percent, touching the highest since August 2011.
The difference between two- and 30-year yields increased to 343 basis points. A steeper yield curve reflects diminishing demand from investors for longer-maturity bonds on speculation that growth and inflation will accelerate at a faster pace.
The Standard & Poor’s 500 Index of stocks jumped 1.3 percent, climbing above 1,700 for the first time.
Treasuries fell for a third month in July, dropping 3.5 percent since the end of April, based on the Bloomberg U.S. Treasury Bond Index. (BUSY) Investment-grade company debt declined 4.1 percent over the past three months even after gaining in July, the Bloomberg USD Corporate Bond Index (BUSC) shows.
“Economic activity expanded at a modest pace during the first half of the year,” the Fed said following a two-day meeting of the Federal Open Market Committee yesterday. “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”
Applications for unemployment insurance payments declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, from a revised 345,000 the prior week, the Labor Department reported today in Washington. The median forecast of 50 economists surveyed by Bloomberg called for 345,000.
“The claims number gives you a sense the jobs picture is improving,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “Tomorrow’s jobs number will be very important.”
The Institute for Supply Management’s manufacturing index increased to 55.4 in July from 50.9 a month earlier, the Tempe, Arizona-based group said today. The median forecast of 84 economists surveyed by Bloomberg called for the measure to rise to 52. Economists’ estimates ranged from 49.6 to 53.5.
Payrolls increased by 185,000 in July and the jobless rate fell to 7.5 percent from 7.6 percent, a separate poll showed before the Labor Department report tomorrow. U.S. gross domestic product grew faster than economists projected in the second quarter, according to a government report yesterday.
“We have seen better data, and every good data print we get brings the Fed a step closer toward tapering,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The Fed’s statement was meaningless. Everyone tried to make it more dovish than it was and we had some month-end buying that bid the market up a bit. But that quickly evaporated.”
Treasury trading volume yesterday at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $375.3 billion. Volume averaged $277.8 billion a day in July, versus $446.2 billion a day in June.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index rose to 91.40 basis points, the highest level since July 12. The average for 2013 is 67.08.
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