Treasuries fell, with 10-year yields reaching a one-week high, after reports showing increased construction spending and expanded U.S manufacturing suggested renewed prospects for economic growth.
The reports are the latest in a slew of economic data due this week that the Federal Reserve will weigh as it determines when to raise interest rates for the first time since 2006.
“The housing part of the equation is helping out, and construction spending, which is a big deal in terms of growth,” said Eric Green, the head of U.S. rates and economic research at Toronto-Dominion Bank’s TD Securities USA unit in New York, one of 22 primary dealers who trade with the Fed. “It all works in a direction that’s contributing to the selloff here.”
Ten-year note yields rose six basis points, or 0.06 percentage point, to 2.18 percent at 5 p.m. in New York. The benchmark 2.125 percent security maturing in May 2025 dropped 1/2, or $5 per $1,000 face amount, to 99 1/2, according to Bloomberg Bond Trader prices.
The Institute for Supply Management’s factory index rose to a three-month high of 52.8 from 51.5 in April, figures from the Tempe, Arizona-based group showed Monday. The median projection of economists in a Bloomberg survey called for a reading of 52.
Construction spending increased by 2.2 percent in April, the Census Bureau reported, more than the 0.8 percent gain expected by economists surveyed by Bloomberg.
U.S. government securities rose earlier after a report showed the Fed’s preferred measure of inflation unexpectedly slowed in April and spending remained subdued, casting doubt on the prospects for higher interest rates by September.
The personal consumption expenditures index was unchanged from the prior month and was up 0.1 percent from a year earlier. That was the smallest 12-month gain since October 2009, and the 36th month it has remained below the Fed’s 2 percent target.
“The Fed is doing their best to try and get off the zero-bound that we’ve been for six-and-a-half years,” said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “The difficulty they’re running into is they say they’re data-dependent, but the data aren’t really supporting much of a liftoff at this point.”
Ellenberger said he sees the likelihood of a rate increase in September at less than 50 percent.
Bond investors now forecast a 1.60 percent average rate of inflation for the next five years, down from 1.61 percent on May 29 and from a 2015 peak of 1.75 percent on May 1.