Treasury Yields Rise to 1-Week High as U.S. Durable Goods Climb

Treasury 10-year yields rose to the highest level in more than a week as orders for durable goods exceeded forecasts, bolstering bets the economy is strong enough for the Federal Reserve to start trimming bond purchases.

Government debt fell a third day before the U.S. is scheduled to sell $29 billion of seven-year notes after auctions of two- and five-year debt this week drew lower-than-average demand. New home sales climbed to a five-year high, the Commerce Department said yesterday. Thirty-year yields approached the highest level in almost two years.

“Durable goods data is showing some strength going into the third quarter,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We have more supply -- people are not willing to go too far out on the curve. That takes away some of the domestic demand. It’s going to be a bit more difficult auction today.”

The benchmark 10-year yield added three basis points, or 0.03 percentage point, to 2.62 percent at 11:21 a.m. in New York, according to Bloomberg Bond Trader prices. The yield touched 2.63 percent, the highest since July 15. The 1.75 percent note due May 2023 dropped 9/32, or $2.81 per $1,000 face amount, to 92 15/32.

The 30-year yield was at 3.68 percent after rising to 3.72 percent on July 8, the most since August 2011.

Investor Loss

Treasuries have slumped this year as signs the Fed will start tapering purchases undermined demand for the securities. Thirty-year bonds handed investors a loss of 11 percent in 2013 through yesterday, compared with a 5.7 percent decline for 10-year notes and a 3.8 percent loss for seven-year debt, Bank of America Merrill Lynch indexes show.

Bookings for goods meant to last at least three years increased 4.2 percent after a revised 5.2 percent gain in May that was bigger than initially reported, the Commerce Department said today in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 1.4 percent advance. Unfilled orders for big-ticket goods rose the most since December 2007.

A separate report showed jobless claims rose by 7,000 to 343,000 in the week ended July 20 from a revised 336,000 the prior period, the Labor Department said in Washington. The median forecast of 49 economists surveyed by Bloomberg projected 340,000. The retooling at carmakers and school closings typical during this time of year continued to influence the figures las week, a spokesman said as the data were released.

‘Upward Path’

Purchases of new U.S. homes rose 8.3 percent in June to an annualized pace of 497,000, the highest level since May 2008, the government said yesterday.

“There’s been a signal that the global business cycle may have reached the bottom and the economy is recovering, albeit at different paces in the U.S. and Europe,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “The U.S. has led the others in terms of growth, and Treasury yields are likely to be on an upward path although we expect some volatility in coming months.”

The Fed, which has been buying $85 billion of bonds each month to put downward pressure on borrowing costs, will start trimming purchases in September, according to a separate Bloomberg survey of economists. It bought $4.83 billion in Treasuries maturing between July 2017 and March 2018 today as part of the program.

Volatility Rises

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 80.2 basis points yesterday, up from 72.62 on July 22, the least since May 24. The gauge rose to 117.89 on July 5, the highest since December 2010.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $345.9 billion yesterday, above this month’s average of $278.4 billion.

The Fed’s measure of traders’ forecasts for costs in the economy for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, was at 2.59 percent. It has risen from 2.33 percent last month, which was the lowest since 2011. The average over the past decade is 2.75 percent.

“We expect the auction to go well,” said Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York. “They are at decent levels, at 2 percent. The market has cheapened up into supply.”

The seven-year notes scheduled for sale today yielded 2.03 percent in pre-auction trading, compared with 1.93 percent at the previous sale of the securities on June 27. Investors bid for 2.61 times the amount of debt offered last month, compared with the average of 2.65 for the 10 offerings through June.

Direct bidders, non-primary dealers buying for their own accounts, purchased 15.7 percent of the notes last month, the least in 11 months. Indirect bidders, which include foreign central banks, bought 46.4 percent of the securities, the most since August 2011.

Investors at the five-year auction yesterday bid for 2.46 times the amount of debt available, less than the 2.8 average of the prior 10 sales. A two-year sale on July 23 drew bids for 3.08 times the amount offered, compared with the average of 3.54 for the previous 10 auctions.

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