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Treasuries Snap Four-Day Selloff, Head for 4th Week Drop

Treasuries halted a four-day decline after a technical indicator showed 10-year yields have climbed to levels that may increase investor demand for U.S. government debt.

A selloff paused when 10-year yields climbed as high as 1.86 percent yesterday, matching the 200-day moving average, according to data compiled by Bloomberg. Treasuries headed for a fourth straight weekly decline, the longest streak since December 2010, as reports on building permits, industrial production, retail sales, consumer confidence and jobs all showed improvement. So-called convexity-related hedging by holders of mortgage-backed securities may have contributed to declines, according to analysts at Bank of America Corp.

“We seem to be trying to get our footing in this 1.80 percent to 1.85 percent area,” said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers that trade with the Federal Reserve. “We could generate a near-term rally just because of the technicals.”

The benchmark 10-year yield fell two basis points or 0.02 percentage point to 1.81 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 rose 7/32 or $2.19 per $1,000 face value to 98 10/32.

Futures Positions

Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 10-year note futures in the week ending Aug. 14, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 32,336 contracts on the Chicago Board of Trade. Last week, traders were net-short 14,595 contracts.

The 10-year yield has climbed 35 basis points since July 20, marking gains in each of the four weeks since, the longest run of increases since the period ended Dec. 24, 2010. Yields have climbed 15 basis points this week, the most since the week ended June 8 when they rose 18 basis points from a then-record low 1.44 percent.

Rising Treasury yields help drive mortgage rates higher, triggering convexity-related hedging from holders of mortgage-backed securities, wrote Priya Misra and Shyam Rajan, interest-rate strategists at Bank of America in New York, in a note to clients today.

Mortgage Hedges

Rising mortgage rates decrease the risk of mortgage refinancing, which increases bond holders’ duration. The hedging spurs demand to pay fixed rates in swaps, driving swap rates higher and swap spreads wider.

Convexity-related hedging may “have been responsible for the last 10 basis points of the selloff,” they wrote.

U.S. government securities have handed investors a 1.6 percent loss this month as of yesterday, according to Bank of America Merrill Lynch indexes, as economic data exceeded forecasts and the European debt crisis eased. An index of sovereign bonds around the world slid 0.7 percent, reflecting waning demand for the relative safety of debt.

“Rates have backed up significantly,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, a primary dealer. “I don’t think a lot of things have changed. The economy remains fragile, the situation in Europe remains a wild card.”

The MSCI All-Country World Index of stocks returned 3.2 percent including reinvested dividends, according to data compiled by Bloomberg.

Economic Data

The index of U.S. leading economic indicators climbed more than forecast in July, a sign of sustained expansion in the world’s largest economy. The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment increased to 73.6, the highest level since May, from 72.3 the prior month.

U.S. retail sales rose 0.8 percent in July, a report on Aug. 14 showed, above the median estimate of economists in a Bloomberg survey. A separate report on Aug. 3 showed the U.S. added 163,000 jobs last month, more than the 100,000 projected by analysts.

Signs of improvement in the economy have boosted yields as investors reduced bets that the Fed will start another quantitative easing program when it meets on Sept. 12-13.

“You can see interests rates go modestly higher from here,” Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock Inc. in New York, which has $3.68 trillion under management, said during an interview on Bloomberg Television with Tom Keene. “We have a 2 percent year-end forecast. What is going to cap any of this increases in interest rates are the fiscal cliff issues, constraints on the U.S. economy.”

Yield Spread

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt, has widened to 2.25 percentage points from 2.08 percentage points a month ago. The average during the past decade is 2.15 percentage points.

Germany’s Chancellor Angela Merkel backed the European Central Bank’s conditions for helping reduce borrowing costs in indebted countries, saying Germany is “in line” with the ECB’s approach to defending the euro. Merkel is Also considering easing Greece’s bailout terms, fanning tensions with members of her coalition who oppose giving the Greek government any more concessions, two German lawmakers said.

The difference in yields between U.S. and German 10-year bonds reached its widest point since June 6, with U.S. yields exceeding German yields by 32 basis points, or 0.32 percentage point.

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