Treasuries Drop as Factory Data Spur Rate-Increase Bets

Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve, during a Joint Economic Committee hearing in Washington, D.C., on May 7, 2014. Close

Janet Yellen, chair of the U.S. Federal Reserve, during a Joint Economic Committee... Read More

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Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve, during a Joint Economic Committee hearing in Washington, D.C., on May 7, 2014.

Treasuries fell the most in almost two weeks, extending the first monthly drop since March, on speculation U.S. economic growth is robust enough for the Federal Reserve to raise interest rates next year.

Yields on benchmark 10-year notes climbed from a three-week low reached June 27 as measures of U.S. manufacturing showed expansion in June and China’s factory output grew at the fastest pace this year. BlackRock Inc., the world’s biggest money manager, forecast the first increase in borrowing costs for the second quarter of 2015. A report this week may show employers added more than 200,000 jobs for a fifth month.

“The global manufacturing recovery is on pace,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 22 primary dealers that trade with the Fed. “The market had gotten a little bit overbought and people who were long are looking to take chips off the table before payrolls.” A long is a bet the price of a security will rise.

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.57 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It earlier added four basis points, the biggest gain since June 19. The average yield for the past decade is 3.41 percent. The 2.5 percent note maturing in May 2024 fell 9/32, or $2.81 per $1,000 face amount, to 99 14/32.

The Bloomberg U.S. Treasury Bond Index (BUSY) declined 0.1 percent in June. It gained 3.3 percent for the first half of 2014, reflecting a contraction in the economy from January through March. Treasuries due in 10 years or more gained 12 percent this year, according to the index, and those due in one to three years returned 0.4 percent.

Trading Range

The 10-year Treasury note yield is trading in a range of 2.50 percent to 2.75 percent as the market awaits clarity on the Fed’s plans to exit bond buying under its quantitative-easing strategy, according to Sharon Stark at D.A. Davidson & Co.

“I don’t see a break out until the fall, when the Fed decides whether they end quantitative easing in October or December,” the fixed-income strategist said from St. Petersburg, Florida. “The Fed can be data-dependent between now and the fall. But once QE ends, they’ve got to telegraph some plan going forward.”

Policy makers cut monthly debt purchases to $35 billion at their June 17-18 meeting, down from $85 billion last year. They left the target rate for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.

BlackRock’s View

The Fed rate will probably be increased in the second quarter of next year, Stephen Cohen, BlackRock chief investment strategist for international fixed income, said in London today. The company’s view is not far from consensus and there would need to be a big improvement in U.S. economic data to change the market’s view, Cohen said.

The Treasury yield curve will steepen as data improves and consumer prices rise, he said at a media briefing. The yield curve is a chart showing rates on bonds of different maturities.

The gap between yields on U.S. two-year notes and 30-year bonds was 2.93 percentage points. It touched 2.86 percentage points on June 26, the least since May 2013.

Traders see about a 54 percent chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, up from 43 percent odds at the end of May, Fed Funds futures show.

Factory Gauges

U.S. government debt remained lower today as the Markit Economics index of U.S. manufacturing increased to 57.3 in June, the highest in more than four years, from 56.4 a month earlier, the London-based group said today. Readings exceeding 50 in the purchasing managers’ gauge indicate expansion. The median forecast in a Bloomberg survey of economists was 57.5, as was the preliminary reading.

“We’ve been seeing generally good signs of activity across the manufacturing sector,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer.

The Institute for Supply Management’s manufacturing index was little changed at 55.3 in June from 55.4 in the prior month, the Tempe, Arizona-based group’s report showed today. The median forecast of 88 economists surveyed by Bloomberg called for 55.9.

U.S. gross domestic product shrank at a 2.9 percent annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25. Harsh winter weather in early 2014 was blamed in part for the contraction.

‘Bounce-Back’

“The market is looking for some confirmation that first-quarter gross domestic product was an aberration and that second-quarter GDP is a real bounce-back,” said Ray Remy, head of fixed income in New York at primary dealer Daiwa Capital Markets America Inc. “It’s all about the data.”

In China, the purchasing managers index measuring manufacturing increased to 51 in June, the highest level since December, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing. A private manufacturing index from HSBC Holdings Plc and Markit Economics also climbed to the most this year.

Investors in Treasuries increased bets the prices of the securities would drop, according to a survey by JPMorgan Chase & Co. for the week ending yesterday.

The proportion of net shorts was 27 percentage points, according to JPMorgan, compared with net shorts of 21 percentage points in the previous week. Outright shorts rose to 38 percent from 34 percent, while outright longs dropped to 11 percent from 13 percent. Investors cut neutral bets to 51 percent from 53 percent.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Robert Burgess at bburgess@bloomberg.net Kenneth Pringle, Greg Storey

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