Treasury 10-year yields reached the highest level in almost seven weeks after a report showed U.S. retail sales unexpectedly increased in April, renewing optimism central-bank efforts to spur economic growth are working.
U.S. 10-year benchmark yields rose for a third day as European policy makers expressed a willingness to consider more ways to spur growth following weekend talks of the Group of Seven. A report May 17 is forecast to show consumer sentiment in May climbed to the highest level this year.
“Ten-year notes will go to 2 percent in the short term, the next two to three months,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “There’s still more data to go, but the Fed is getting a little nervous. They may start tapering in the next three months.”
The U.S. 10-year yield increased two basis points, or 0.02 percentage point, to 1.92 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 fell 6/32, or $1.88 per $1,000 face amount, to 98 15/32. It earlier climbed to 1.94 percent, the highest level since March 26. The yield increased 16 basis points last week.
The 14-day relative strength index for the 10-year note reached 68. A level above 70 suggests the yield may be poised to change direction. It was at 53 a week earlier.
Treasuries have lost 0.9 percent this month through May 10, according to Bank of America Merrill Lynch indexes, following three months of gains.
Hedge-fund managers and other large speculators decreased their net-long position in 10-year note futures in the week ending May 7, according to U.S. Commodity Futures Trading Commission data.
Speculative long positions or bets prices will rise, outnumbered short positions by 37,956 contracts on the Chicago Board of Trade. Net-long positions fell by 94,088 contracts, or 71 percent, from a week earlier, resulting in the biggest reduction in net longs since March.
“It’s the wave of short-term positive economic sentiment that’s continuing here,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “We’re likely to see some value buying as the 10-year comes in the mid-1.90 percent area, 1.94 percent is where buying is likely to step in.”
U.S. 10-year yields are above the so-called upper Bollinger-band level of 1.88 percent, suggesting the increase in rates is about to end. The bands gauge volatility by plotting standard deviations above and below a moving average. Analysts use them to determine a probable range for a rate or security.
The Fed said after a policy meeting on May 1 it will keep buying bonds “until the outlook for the labor market has improved substantially.” It also left unchanged a statement saying it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
The Fed is buying $85 billion of Treasury and mortgage debt each month to support the economy by putting downward pressure on borrowing costs. There will be no purchases today. Fed buying resumes tomorrow as the Fed will purchase up to $3.5 billion in securities maturing between May 2020 and February 2023.
U.S. economic growth quickened to 2.5 percent in the first three months of the year from 0.4 percent in the final quarter of 2012. The unemployment rate fell to a four-year low of 7.5 percent in April.
Retail sales rose by 0.1 percent, compared with a drop of 0.4 percent the previous month. Purchases excluding automobiles and gasoline rose by 0.6 percent. The median forecast of 81 economists in a Bloomberg News survey predicted retail sales would drop by 0.3 percent in April from the previous month.
“Economics now matter,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Fed. “Retail sales were better than expected and that may have led to the market going to higher yields.”
The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 77.8 in May from 76.4 a month earlier, according to the median projection in a Bloomberg News survey of 65 economists before the report May 17.
Trading volume dropped 33 percent to $302 billion from $450 billion on May 10, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for this year is $281 billion.
Volatility rose for a second day. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries increased to 56.51 basis points, from 55.32 basis points on May 10, after falling May 9 to an all-time low of 48.87 basis points. The measure averaged 62.6 basis points during the past 12 months.
Euro-area finance ministers and central bankers left talks at the G-7 meeting at Aylesbury, near London, signaling they’re poised to scale back austerity and are open to increased monetary aid. European officials will meet in Brussels today to discuss the economy and review aid payments for crisis-struck nations such as Greece and Spain.