Treasuries Decline as U.S. Housing Starts Beat Forecasts

Treasuries dropped, pushing 10-year note yields higher for the first time in five days, as better-than-forecast reports on housing starts and jobless claims added to signs the economic recovery is strengthening.

Yields on the benchmark security climbed from the lowest level in two weeks as the number of Americans filing first-time claims for unemployment insurance payments fell more than forecast last week to the lowest level in five years. Treasuries were the most expensive in two weeks yesterday, according to a model created by economists at the Fed.

“The data took over as the driver for the move higher in rates,” said Sean Murphy, a trader in New York at Societe Generale SA, one of the 21 primary dealers that trade Treasuries with the Fed. “The economy has improved or shows moderate growth across the board. The risk-on tone may continue for a little bit.”

The 10-year yield climbed six basis points, or 0.06 percentage point, to 1.88 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield dropped to 1.80 percent yesterday, the least since Jan. 2. The 1.625 percent note maturing in November 2022 fell 17/32, or $5.31 per $1,000 face amount, to 97 23/32.

Yields on 30-year bonds rose six basis points to 3.07 percent.

‘Pretty Solid’

Treasuries have handed investors a 0.3 percent loss this year, or minus 6.4 percent at an annual rate, according to Bank of America Merrill Lynch indexes. Sovereign bonds around the world have dropped 0.1 percent in January, based on the data.

Treasury trading volume rose today to $329 billion, the highest level since Jan. 10, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume averaged $240 billion in 2012.

Housing starts climbed 12.1 percent last month to a 954,000 annual rate, exceeding all forecasts in a Bloomberg survey of economists and the most since June 2008, the Commerce Department reported today in Washington. For all of last year, construction began on 780,000 homes, up from 608,800 in 2011 and also the most since 2008.

“The starts number is pretty solid -- the guts of the report was constructive, driven by both single- and multi-family space,” said Jacob Oubina, a senior U.S. economist at Royal Bank of Canada’s RBC Capital Markets unit in New York, one of 21 primary dealers that trade Treasuries with the Fed. “It had to elicit a reaction.”

Jobless Claims

Applications for jobless benefits decreased by 37,000 to 335,000 in the week ended Jan. 12, the lowest level since the period ended Jan. 19, 2008, Labor Department figures showed today. Economists forecast 369,000 claims, according to the median estimate in a Bloomberg survey. A spokesman for the agency said the figure may reflect challenges adjusting the data for the pickup in claims that typically occurs in early January.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, dropped to minus 0.77 percent yesterday in New York, the least since Jan. 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Yields on the benchmark note will increase to 2.2 percent by Dec. 31, according to the median forecast in a Bloomberg survey of financial companies.

TIPS Auction

German government bonds fell today, with two-year yields rising seven basis points to 0.19 percent, the highest since June, on speculation financial institutions will begin paying back loans from the European Central Bank, pushing up overnight borrowing rates. Ten-year bund yields rose to 1.62 percent, the highest level since Oct. 25.

The U.S. today announced it will sell $15 billion in 10-year inflation-protected securities on Jan. 24. It previously sold $13 billion of the securities on Nov. 21 at a yield of negative 0.72 percent, compared with the record-low yield of negative 0.75 percent at the September auction. The last six note sales since January 2012 have drawn negative yields.

The Fed purchased $3.357 billion of Treasuries due from February 2020 to November 2022 today as part of its monthly $85 billion in government and mortgage-debt purchases designed to stimulate the economy.

Treasuries rose for a fourth day yesterday on speculation political wrangling between President Barack Obama and Republican lawmakers over the U.S. debt ceiling will curb economic growth, fueling demand for safer assets.