As the threat of a Greece debt default wanes, Treasury traders are again focused on parsing U.S. economic data to gauge when the Federal Reserve will raise interest rates.
Investors expecting higher rates forced the U.S. to pay the most this year at an auction of two-year notes. The premium offered by Treasuries over developed-market peers has risen from an almost five-month low as demand for U.S. government debt ebbs with European turmoil subsiding. Reports showed orders for business equipment increased in May and new-home sales rose to the highest level in seven years.
“Data hasn’t been quite that bad and there’s been improvement in the Greece situation,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, a primary dealer. “The market’s taking a little joy from that.”
Yields on benchmark U.S. 10-year securities rose four basis points, or 0.04 percentage point, to 2.41 percent as of 4:59 p.m. in New York, according to Bloomberg Bond Trader data. They touched 2.43 percent, the highest since June 10. The price of the 2.125 percent note due in May 2025 fell 10/32, or $3.13 per $1,000 face value, to 97 1/2.
The weighted average of estimates in a Bloomberg analyst survey is for the yield to rise to 2.56 percent by the end of 2015. Futures show a 35 percent chance the Fed will raise its benchmark rate from near zero in September and a 71 percent chance of an increase by December, according to data compiled by Bloomberg.
“The likely decent performance of economic growth in the second and third quarters sets the stage for a September initial rate hike,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets.
The Treasury Department sold $26 billion of two-year notes at a yield of 0.692 percent, the most since December. The U.S. will sell $35 billion of five-year securities on Wednesday and $29 billion of seven-year debt on June 25.
The extra yield offered by 10-year Treasuries over other Group-of-Seven countries climbed to 97 basis points Tuesday, the highest since June 12. It’s risen 10 basis points since Friday, when it was the lowest since Feb. 5.
Fed Chair Janet Yellen acknowledged this month that there could be spillover to the U.S. in the event Greece could not reach a deal, and that could affect the path of U.S. policy.
European leaders have given the Greek government 48 hours to make the final push needed to satisfy creditors, after welcoming its proposals on Monday that included pension reform.
“People were long Treasuries on the possible default of Greece, and they’re unwinding that trade,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed. A long is a bet the price of a security will rise.
Yellen reiterated this month that policy decisions would depend on the evolution of economic data.
Orders for non-military capital goods excluding aircraft rose 0.4 percent last month after a 0.3 percent decrease in April, data from the Commerce Department showed Tuesday in Washington. New home sales climbed 2.2 percent to a 546,000 annualized pace, exceeding all forecasts in a Bloomberg survey of economists and the most since February 2008, Commerce Department data showed.