Treasuries Extend Drop on Data Pointing to Recovery

(Corrects 14th paragraph of article published March 31 to show Morgan Stanley report was issued March 7. Adds that the quoted material was written by Matthew Hornbach.)

Treasuries fell, extending their first monthly loss this year, amid speculation U.S. data this week will show a recovery in the world’s largest economy is on track, damping demand for the safest securities.

Ten-year notes declined as Russia and the U.S. sought a diplomatic solution to the crisis in Ukraine, boosting the allure of higher-yielding assets. Manufacturing and employment improved in the U.S. in March, based on Bloomberg News surveys of economists before reports this week. The difference between five- and 30-year yields touched the least since October 2009 as Federal Reserve Chair Janet Yellen prepared to speak today, after she indicated interest rates may rise in 2015.

“The perception is that U.S. data will be stronger this week,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “We have all the big data points. The yield curve should continue to flatten.”

Treasury 10-year yields increased three basis points, or 0.03 percentage point, to 2.75 percent at 7:23 a.m. in New York, according to Bloomberg Bond Trader prices. The rate has climbed 10 basis points this month. The 2.75 percent note maturing in February 2024 dropped 6/32, or $1.88 per $1,000-face amount, to 100 2/32.

Russia and the U.S. agree on the need for a diplomatic solution to tension over Ukraine, Russian Foreign Minister Sergei Lavrov said yesterday.

The Stoxx Europe 600 Index of shares rose for a fifth day, gaining 0.2 percent, while Standard & Poor’s 500 Index futures expiring in June climbed 0.3 percent.

Spread Shrinks

Treasuries have fallen 0.3 percent in March, based on the Bloomberg U.S. Treasury Bond Index (BUSY), set for the first monthly decline since December. They are up 1.7 percent for the first quarter, gaining earlier in the year as winter weather curbed growth. The extra yield company bonds offer over Treasuries shrank to 1.73 percentage points, according to Bank of America Merrill Lynch indexes, the least since 2007.

The Bloomberg U.S. Corporate Bond Index (BUSC) of investment-grade company bonds advanced 0.1 percent in March. It has risen 3.1 percent since the start of 2014, its best quarterly performance since the three months ended September in 2012.

The Institute for Supply Management’s U.S. manufacturing index rose to 54 in March from 53.2 in February, based on a Bloomberg survey before the report tomorrow.

The U.S. economy added 200,000 jobs, versus 175,000 for February, a separate survey shows before the Labor Department releases the figures on April 4.

Yellen Talk

Yellen is scheduled to speak in Chicago at 8:55 a.m. local time. She said this month the central bank may end the bond-buying program it uses to support the economy this fall and increase borrowing costs six months after that.

The comments sent short- and mid-term yields higher on speculation the Fed is planning a series of rate increases after holding its target for overnight lending at almost zero since 2008.

The difference between five- and 30-year yields touched 1.78 percentage points today, before widening to 1.80 percentage point. It is more than the average over the past decade of 1.54 percentage points.

“The Treasury market is in trouble,” Matthew Hornbach, the global head of interest rate strategy at Morgan Stanley, one of the 22 primary dealers that trade directly with the Fed, told clients in a report March 7. “As the snow melts and the ground thaws, front-end rates should unfreeze. We suggest investors exercise caution in short- and intermediate-maturity Treasuries.”

Two- and five-year yields will move closer to 30-year yields, according to the report by New York-based strategists Hornbach, Vipul Jain, Michael Ortiz, Tiffany Wilding, Guneet Dhingra and Mikhail Levin.

The chance the central bank will increase its benchmark rate to 0.5 percent or more by January is 15 percent, based on futures contracts. The odds were about 11 percent a month ago.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins, Mark McCord

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