Short-Dated Treasuries Fall on Fed View Before Housing Report

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Two-year Treasuries declined before housing data this week that analysts predict will show the U.S. economy is strong enough to withstand higher interest rates.

U.S. government securities have given up their increases from earlier in 2015 as investors prepare for the central bank to increase borrowing costs for the first time since 2006. Federal Reserve Chair Janet Yellen told lawmakers last week she expected policy makers to act this year and that they’ll probably shift rates gradually. Demand for haven assets declined as Greece was set to secure a bailout that averts financial collapse.

“Yields are extremely low, and people are more comfortable to price in higher Fed interest rates now that distraction from Greece is out of the way,” said Richard Kelly, London-based head of global strategy at Toronto Dominion Bank. “We see 10-year yields rising to 2.50 percent by the end of the year, with shorter-dated rates rising at a faster pace.”

The yield on two-year notes rose two basis points to 0.69 percent as of 8:30 a.m. New York time. The 0.625 percent security due in June 2017 fell 2/32, or 63 cents per $1,000 in face amount, to 99 28/32. The median of analyst forecasts compiled by Bloomberg is for it to climb to 1.10 percent by the end of 2015.

The benchmark 10-year note yield climbed two basis points to 2.37 percent.

Trading of Treasuries began in London after being closed in Japan for a holiday.

Home Sales

U.S. existing home sales climbed to an annual rate of 5.4 million in June, from 5.35 million in May, based on a Bloomberg survey of analysts before the report is released on July 22. New-home sales were little changed at an annual pace of 546,000, the highest since 2008, based on economists’ responses ahead of the data on July 24.

A report last week showed housing starts increased more in June than economists predicted.

JPMorgan Chase & Co. suggested investors sell two-year Treasury notes as the market is underestimating the pace of the Fed’s rate increases. JPMorgan predicts the U.S. central bank will lift borrowing costs twice this year, starting in September.

“Stay short two-year Treasuries,” JPMorgan analysts wrote in a research note published on July 18. “Markets remains under-priced for lift-off versus out forecast. Valuations remain rich.” A short position is a bet that an asset price will fall.

Treasuries were little changed this year through July 17, after being up as much as 3 percent at the end of January, based on the Bloomberg U.S. Treasury Bond Index.

(An earlier version of this story corrected Treasuries’ direction in the headline and lead.)

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