Treasury 10-year notes fell for a second month before the July jobs report that is forecast to show a sixth-straight month of 200,000-plus gains, backing speculation that economic growth is accelerating.
The benchmark yield touched a three-week high after a report showed monthly jobless claims (INJCJC) at the lowest level in eight years. The debt erased losses as stocks fell and credit-market concern increased on Argentina’s default and a Portuguese bank being ordered to boost capital. The difference between yields on five-year notes and 30-year debt rose from the lowest levels since 2009 amid speculation the Federal Reserve will raise interest rates next year after second-quarter economic growth surged past analysts’ forecasts.
“The market is still biased to higher rates over the long term with the growth picture slowly getting better and the labor market improving,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “As we get closer to the Fed tightening, the front end remains under pressure.” Lederer said investors should sell shorter-term Treasuries and look to buy longer-dated debt when prices decline.
The U.S. 10-year yield, a benchmark for global borrowing costs, was little changed at 2.56 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in May 2024 was 99 15/32. The yield reached the highest level since July 8 and has increased three basis points this month.
Treasuries fell 0.1 percent this month through yesterday, matching June’s decline, according to the Bloomberg U.S. Treasury Bond Index. (BUSY)
Trading patterns indicate the Treasury 10-year note yield is poised to touch 2.632 percent after breaking through the 40-day moving average of 2.56 percent yesterday, according to David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. Ader said he expects the yield will climb to 2.85 percent by year-end.
The momentum measure “has shifted bearishly,” Ader said, adding that the 40-day moving average has been more reliable than other averages in predicting the direction of yields. Ader recommended buying five-year notes versus 10-year securities if the spread moves back to more than 80 basis points. The target range is 84 to 88 basis points, he said.
Treasury market volatility climbed to 56 basis points yesterday, the most since July 3, according to Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options. It dropped to 52.74 basis points on June 30, the lowest level since May 2013.
U.S. gross domestic product grew at a 4 percent annualized rate in the second quarter, after shrinking a revised 2.1 percent from January through March, Commerce Department figures showed yesterday. The median forecast of economists surveyed by Bloomberg was for growth of 3 percent.
“The market has re-priced the growth trajectory, and we will have a tough time testing 2.5 percent again without some change in the fundamental outlook,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. Traders will “stay within this range, with people wanting to be neutral heading in to the jobs report.”
The difference between yields on five-year notes and 30-year debt, known as the yield curve, steepened to 156 basis points after narrowing yesterday to as low as 149 basis points.
The four-week average of jobless claims, considered a less volatile measure than the weekly figure, dropped to 297,250, the lowest since April 2006, from 300,750 the prior week. Claims in the period ended July 26 climbed to 302,000, in line with the median forecast of economists surveyed by Bloomberg, from a revised 279,000 the prior week that was the lowest since 2000.
The U.S. added more than 230,000 jobs in July, according to a Bloomberg News survey of economists before the Labor Department’s monthly employment report tomorrow.
“People are starting to pay attention to the fundamentals -- normally they don’t,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “A solid number combined with GDP will probably knock the Treasury market back a little bit,” he said, referring to the employment report. Coard said the 10-year yields will need to rise to 2.75 percent to attract investors.
The Fed reduced its monthly pace of debt purchases by $10 billion to $25 billion at a two-day meeting that ended yesterday.
Traders see a 51 percent chance the central bank will raise the target for its benchmark to at least 0.5 percent by June 2015, based on futures contracts.
The 10-year yield will climb to 3.11 percent by year-end, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.