Investors in Treasuries are breathing a sigh of relief after a report on retail sales showed the U.S economy growing at a steady pace, but not a spectacular one, sparking the biggest rally in a month for government bonds.
Traders had sent the yield on the benchmark 10-year note to an eight-month high before the report on concern that May retail sales growth would exceed the 1.2 percent median estimate and move the Federal Reserve closer to raising interest rates. Yields declined the most since May 15 after the sales figure was in line with expectations and amid a rally in European debt that helped boost the relative attractiveness of U.S. government bonds.
“The market is good at getting ahead of things,” said Robert Tipp, chief investment strategist in Newark, New Jersey for Prudential Financial Inc.’s fixed-income division, which manages $560 billion. “Part of the push higher in yields has been in anticipation of the rebound from weak data we’ve had in winter.”
The 10-year note yield fell 11 basis points to 2.38 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices, after it touched 2.4985 percent, the highest since Oct. 1. The price of the benchmark 2.125 percent note due May 2025 rose 29/32, or $9.06 per $1,000 face amount, to 97 25/32, according to Bloomberg Bond Trader prices.
The yield on the 30-year bond dropped by 12 basis points to 3.10 percent after trading Wednesday at the highest since September.
Bonds added to gains after the Treasury Department’s sale of $13 billion in 30-year bonds attracted higher-than-average demand.
The decline in Treasury yields Thursday comes as securities from German bunds to Spanish and Italian government bonds rallied on optimism that negotiations aimed at securing funding for Greece are progressing.
“You had a big reversal in European government bonds,” said Thomas Di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “Most of the selling pressure we’ve seen was coming out of Europe, and the reversal took pressure off Treasuries.”
Traders have been raising expectations for when the Fed will tighten monetary policy since the May employment report exceeded forecasts. Fed fund futures give a 55 percent probability that the central bank will lift rates in September, up from 52 percent on June 8, according to data compiled by Bloomberg.
Investors have remained bearish on Treasuries as recent economic data signaled strength. The proportion of net shorts, or bets the price of Treasuries will decrease, was at 30 percentage points in the week ending June 8, compared with 32 percentage points the previous week, according to according to a survey by JPMorgan Chase & Co.
“The market was certainly short,” di Galoma said. “Accounts have been betting for a rate rise.”
The recent rise in Treasury yields has pushed borrowing costs higher for homebuyers. Mortgage rates in the U.S., which tend to track 10-year Treasury yields, jumped to an eight-month high, with the average 30-year fixed-rate loan rate rising to 4.04 percent from 3.87 percent a week earlier, Freddie Mac said Thursday.
The U.S. sold $13 billion of 30-year bonds at a yield of 3.138 percent Thursday, the highest since September. That was lower than the 3.151 percent yield traders anticipated in a Bloomberg News survey before the auction.
The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.54, compared with an average of 2.39 at the past 10 sales.
The U.S. auctioned $24 billion of three-year debt on June 9 at a yield of 1.125 percent, the highest since April 2011, and $21 billion of 10-year notes on Wednesday. The sale of benchmark debt drew the most demand this year as the 2.461 percent yield was the highest since September.
U.S. 10-year yields are higher than 18 of 24 other developed nations, according to Bloomberg data. The U.S. yields are still 1.54 percentage points higher than German 10-year bund yields, which are trading just below 1 percent, according to Bloomberg data.
Treasuries have lost 1.6 percent in the past month through Wednesday, according to Bloomberg World Bond Indexes. By comparison, German bunds have lost 2.9 percent.