Treasuries Touch Lowest in 3 Weeks on Services Growth

Treasury 10-year notes fell for the fifth straight day, the longest stretch of losses since October, after the Institute for Supply Management’s non-manufacturing index (BUSY) rose more than forecast in May.

The benchmark securities extended a drop after the Federal Reserve said the economy expanded at a modest to moderate pace last month. The notes rose earlier after a private report showed U.S. companies added fewer jobs than forecast in May and the trade deficit in April ballooned to the widest in two years. European Central Bank policy makers meet tomorrow to consider a package of stimulus measures.

“We had the ISM number come in, which was on the strong side -- that brought us to higher yields,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors.

The U.S. 10-year yield rose one basis points, or 0.01 percentage point, to 2.6 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield touched 2.61 percent, the highest level since May 14. The price of the 2.5 percent note due May 2024 fell 1/32 or $0.31 per $1,000 face amount to 99 3/32.

The 10-year note yield has risen 20 basis points since touching 2.4 percent on May 29, the lowest level since June 2013.

Goldman’s View

Equity returns are poised to beat fixed income and government bonds aren’t attractive anywhere, according to Abby Joseph Cohen, a senior investment strategist at Goldman Sachs Group Inc. U.S. consumers are doing better and exports are the fastest part of the economy, she said at a Standard & Poor’s conference in New York today.

“We really are concerned about bonds, but not necessarily this week or this month,” she said. “However, for those who have intermediate- to long-term investment horizons, our conclusion is bonds are not the place to be.”

The S&P 500 index of stocks reached an all-time high today after advancing 2.1 percent in May for a fourth consecutive monthly increase.

The Bank of America Merrill Lynch MOVE Index, which measures price swings based on one-month Treasury options, climbed to 64.9 basis points, the highest level since April 3. The average over the past decade is 92.2.

Volatility Rises

The index’s close above 59.75 basis points yesterday indicates the trend has turned higher, targeting 80 basis points and potentially beyond, MacNeil Curry, technical strategist at Bank of America Merrill Lynch wrote in a note to clients.

“As yields turn higher, volatility also rises,” MacNeil said in an interview. “That makes a lot of things more expensive -- it leads to a rise in volatility across asset classes.”

The extra yield 10-year notes offer over their Group of Seven peers was at 61 basis points today. It touched 63.3 basis points yesterday, the widest since May 12.

Even after four days of declines, the Bloomberg U.S. Treasury Bond Index gained 2.8 percent for 2014 through yesterday, headed for its best year since 2011.

Treasuries fell today after ISM’s non-manufacturing index increased to 56.3 from 55.2 a month earlier, the Tempe, Arizona-based group said. The median forecast of 75 economists in a Bloomberg survey called for 55.5. Estimates ranged from 54 to 58. Readings greater than 50 signal expansion.

‘Recovering’ Economy

“We’re seeing strength across the board in ISM non-manufacturing -- yields need to move higher,” said Carl Riccadonna, senior U.S. economist in New York at Deutsche Bank Securities Inc., one of 22 primary dealers that trade with the Federal Reserve. “The tone of the data is consistent with an economy that’s recovering from a first-quarter swoon.”

U.S. government debt extended the drop after seven of 12 districts saw “moderate” growth, with the rest characterized as “modest,” the Fed said in its Beige Book business survey, which is based on reports from its district banks.

Ten-year notes rose earlier after ADP Research Institute said U.S. employers added 179,000 workers to their payrolls in May, below the 210,000 median forecast of 45 economists surveyed by Bloomberg.

Nonfarm payrolls data on June 6 may show the economy added more than 200,000 jobs for a fourth month, according to a Bloomberg survey.

‘Weaker Profile’

The trade gap rose by 6.9 percent to $47.2 billion from the prior month’s $44.2 billion, larger than previously estimated, Commerce Department figures showed. The reading exceeded all estimates in a Bloomberg survey of 70 economists and was the biggest since April 2012.

“The deterioration suggests a slightly weaker profile for the second quarter,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, a primary dealer. “We will have to trim Q2 gross domestic product to some extent.”

GDP is forecast to grow 3.5 percent in the second quarter, according to a Bloomberg survey of economists.

Porcelli forecasts 10-year yields will rise to 3.3 percent by year-end. The median estimate in a Bloomberg survey of 73 economists and strategists is 3.15 percent.

Forty-four of 50 economists surveyed by Bloomberg News predict the ECB will become the first major central bank to take interest rates below zero by cutting its deposit rate. All except two of 60 respondents in a separate Bloomberg survey said the ECB will also lower its main refinancing rate from a record-low 0.25 percent.

“A decent-size easing from the ECB could trigger good overseas demand for Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

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 editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Paul Cox

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