Treasuries fell, with benchmark 10-year yields rising for the first time in four weeks, as an accord aimed at ending the crisis in Ukraine and signs of a strengthening U.S. economy crimped refuge demand.
Thirty-year bond yields advanced from a nine-month low as reports showed initial jobless claims were lower than forecast last week, consumer prices gains in March exceeded estimates and a manufacturing index expanded in April, stoking speculation the Federal Reserve will raise interest rates at some point next year. The U.S. will sell $96 billion in notes next week.
“Geopolitical issues, while still here, have ebbed into the weekend, allowing the market to focus more on fundamentals,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “Investors are starting to feel more comfortable that the economic data is starting to take a turn for the positive and that has allowed rates to start to climb.”
Benchmark 10-year yields added 10 basis points this week, or 0.10 percentage point, to 2.72 percent in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due in February 2024 lost 27/32, or $8.44 per $1,000 face amount, to 100 7/32. The debt last posted a loss in the week ended March 21.
U.S. five-year yields increased 16 basis points to 1.74 percent. The yield on the 30-year bond climbed four basis points to 3.52 percent after falling to 3.43 percent on April 15, the lowest level since July 3.
Trading of U.S. government securities is closed for Good Friday, according to the Securities Industry & Financial Markets Association. On April 21, trading will stop at 3 p.m. in Japan and remain closed during London hours for the U.K.’s Easter Monday. The market will open as usual in the U.S. on April 21.
Treasuries due in 10 years and longer have gained 2 percent this month and 9.4 percent this year, according to Bloomberg U.S. Treasury Bond Index data. The broader Treasury market has advanced 0.6 percent this month and 2.3 percent this year, according to index data.
After investors pulled $10.3 billion in March out of government bond Exchange Traded Funds, the biggest exodus since December 2010, investors have returned to U.S. debt funds, with inflows off $403 million in April, data compiled by Bloomberg show.
Treasury notes fell April 16 as Fed Chair Janet Yellen said the central bank has a “continuing commitment” to support the recovery even as policy makers see full employment by late 2016. In a speech in New York that outlined the policy framework she uses, Yellen addressed investors on factors that may influence the policy rate.
“The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” Yellen said. The jobless rate was 6.7 percent in March.
Fed policy makers are unwinding the bond-buying program they have used to support the economy. They have kept their target for overnight lending between banks in a range of zero to 0.25 percent since 2008.
“She was very, very intentional about explaining her vision for the approach to adapting fed policy to economic performance,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The fives will be the first place to cheapen as the Fed looks to tighten.”
Futures prices put the likelihood the Fed will start raising rates in July 2015 at 71 percent yesterday, based on trading on the CME Group Inc.’s exchange. The chances for a raise increase in June 2015 fell to 49 percent, compared with 54 percent on April 4.
Government reports this week added to evidence the economy is showing faster expansion is underway after a colder-than-average winter restrained growth in early 2014.
The consumer price index rose 1.5 percent in March from a year earlier and increased 0.2 percent from the previous month, according to government data released on April 15. The median forecast of 82 economists surveyed by Bloomberg called for a 0.1 percent March rise.
The Philadelphia Fed’s factory index rose to 16.6 this month, exceeding the 10 forecast in a Bloomberg News survey. Jobless claims increased by 2,000 to 304,000 in the week ended April 12 from a revised 302,000 the prior period that was the lowest since September 2007, a Labor Department report showed. The median forecast of 47 economists surveyed by Bloomberg called for an increase to 315,000.
“The market is still adjusting to a brand new Fed regime, the data is starting to accelerate and tapering at some point is going to have to lead to tightening, all of which has put us in a higher-rate environment,” said David Robin, an interest-rate strategist in New York at Newedge USA LLC, an institutional-brokerage firm. “The economy is in a better position to handle higher yields.”
The U.S. sale of $18 billion of five-year Treasury Inflation Protected Securities yesterday attracted the most demand since December 2012, while the divergence from nominal five-year securities pushed break-even rates to the most since March 19.
The sale drew a yield of negative 0.213 percent, compared with a projection of negative 0.162 percent, according to the average forecast in a Bloomberg News survey of five of the Fed’s primary dealers. The sale had a bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, of 2.70, compared with the average 2.62 at the past 10 sales.
The difference in yields on five-year notes and inflation-protected debt, known as the break-even rate, rose as much as eight basis points yesterday to reach 1.95 percentage points.
Talks in Geneva yesterday between Russian Foreign Minister Sergei Lavrov, his Ukrainian counterpart, Andriy Deshchytsia, U.S. Secretary of State John Kerry and Catherine Ashton, the European Union’s foreign-policy chief, went on for more than six hours, longer than scheduled.
“The Geneva meeting on the situation in Ukraine agreed on initial concrete steps to de-escalate tensions and restore security for all citizens,” the four said in a joint statement. “All sides must refrain from any violence, intimidation or provocative actions.”
“People were long, looking for a squeeze into the weekend, as no one was looking for any positive news out of the Ukraine,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., said yesterday in an email. “The headlines are very encouraging and the market now has people trapped above going into supply next week.” A long is a bet the price of an asset will rise in value.
The Treasury is scheduled to sell $32 billion in two-year notes, $35 billion in five-year debt and $29 billion in seven-year securities on three consecutive days starting April 22.