Treasuries Fall Before GDP Data Seen Backing Fed on Higher Rates

Updated on

Treasuries fell for a third day, the longest run of declines in two weeks, before a report that economists forecast will show U.S. growth is picking up, bolstering the case for raising interest rates.

Ten-year yields climbed to the highest in a week after Federal Reserve policy makers said Wednesday they were satisfied with an improvement in labor markets, keeping alive speculation borrowing costs may rise in September without being definitive about the timing. The Treasury Department is scheduled to sell seven-year notes Thursday. The world’s largest economy grew an annualized 2.5 percent in the second quarter after shrinking in the prior period, according to a Bloomberg analyst survey.

“The Fed’s linguistic baby steps have been slightly supportive for risk sentiment, which has hurt Treasuries,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London. “All eyes on second-quarter gross domestic product.”

The benchmark 10-year note yield climbed one basis point, or 0.01 percentage point, to 2.30 percent as of 7:01 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.125 percent security due in May 2025 fell 1/8, or $1.25 per $1,000 face amount, to 98 15/32.

The yield earlier rose to 2.32 percent, the highest level since July 23.

Auction Planned

The U.S. will sell $29 billion of seven-year securities in the last of four note auctions this week totaling $105 billion. The securities yielded 2.05 percent in pre-auction trading, down from 2.15 percent at a previous auction on June 25.

The GDP report, due later on Thursday, is seen confirming Fed Chair Janet Yellen’s view that a first-quarter contraction was transitory.

In Wednesday’s statement after it held rates near zero, the Federal Open Market Committee described job gains as “solid,” dropping the modifier “somewhat” to describe a decline in labor-market slack. Officials also said they wanted to see “some” additional gains in employment before raising borrowing costs.

Traders are pricing in a 44 percent probability of the Fed raising borrowing costs at or before the September meeting, based on the assumption that the effective fed funds rate will average 0.375 percent following the increase.

“They are not discounting the idea of hiking at the next meeting but still they are going to be cautious,” said Orlando Green, a fixed-income analyst at Credit Agricole SA’s corporate and investment-banking unit in London. “What the market is reflecting is there is still chance of a hike in September but there’s going to be a huge amount of reliance on up-and-coming data.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE