Treasuries Fall as Economic Data Strengthen Before Fed Meeting

Treasuries posted their first drop in three weeks as economic data indicated faster growth before the Federal Reserve meets next week to discuss whether to continue $85 billion a month in bond purchases.

U.S. debt yields rose as July consumer confidence reached the highest level in six years and the demand for new homes increased, while the U.S. sold $99 billion of debt to below-average demand. The Fed meets July 30-31, while the unemployment rate may have declined this month, matching the lowest since 2008.

“Supply and hitting recent tops in prices led to a little bit of selling,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “We’re settling back into a new range rather than looking to accelerate too far either way because of everything next week.”

U.S. 10-year note yields rose eight basis points this week, or 0.08 percentage point, to 2.56 percent, according to Bloomberg Bond Trader prices. The price of the benchmark 1.75 percent security maturing in May 2023 fell 20/32, or $6.25 cents per $1,000 face amount, to 93. The change was the smallest for a week since the five days ended June 28.

Treasuries handed investors a loss of 0.3 percent since the end of June, with the securities poised for a third monthly decline, the Bloomberg U.S. Treasury Bond Index shows. For the year, the index has fallen 2.6 percent. The MSCI World Index of shares has returned 5.9 percent in July and 15 percent in 2013, including reinvested dividends.

Price Swings

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 81.64 yesterday. The gauge has fallen from 117.89 on July 5, which was the highest since December 2010.

Hedge-fund managers and other large speculators shifted to a net-short position in 10-year note futures in the week ending July 23, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 32,312 contracts on the Chicago Board of Trade. Last week, traders were net-long 17,735 contracts.

Traders increased their net-long position in two-year note futures in the week ending July 23, with long positions, or bets prices will rise, outnumbering short positions by 31,995 contracts, the most since May 17.

The Thomson Reuters/University of Michigan final index of U.S. consumer sentiment increased to 85.1 in July from 84.1 the prior month. The median forecast in a Bloomberg survey called for 84 in the final July gauge after a preliminary reading of 83.9.

Economic Data

U.S. new-home sales climbed 8.3 percent to an annualized pace of 497,000 homes, the highest level since May 2008, the Commerce Department said in Washington. The median estimate of 77 economists surveyed by Bloomberg called for a gain to 484,000.

The U.S. unemployment rate fell to 7.5 percent in July from 7.6 percent in June, while payrolls climbed by 185,000, according to economists surveyed before the Labor Department releases figures on Aug. 2.

“The Fed goes on and on about data dependency; payrolls is one of the biggest things on the data horizon,” said Michael Cloherty, head of U.S. interest rate strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, one of 21 firms that trade directly with the Fed. “The data mix we’ve been getting is for a weak second quarter, but the third and fourth look pretty decent.”

Debt Sale

The seven-year notes auctioned July 25 drew bids for 2.54 times the $29 billion offered, the lowest since May 2009. The securities were sold at a high yield of 2.026 percent, up from 1.932 percent at the previous auction on June 27. Investors submitted a below-average number of bids at the $35 billion offerings of two-year notes on July 23 and five-year notes on July 24.

“Demand was a little bit on the tepid side” at the auctions, said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The market is preparing itself for a tapering at some point.”

The central bank, which has been buying $85 billion of bonds each month, will probably start trimming purchases in September, according to a Bloomberg News survey.

The Fed said in a June 19 statement that leaving the federal funds rate in that range “will be appropriate at least as long” as unemployment remains above 6.5 percent and the forecast for inflation in one-to-two years doesn’t exceed 2.5 percent. Fed Chairman Ben S. Bernanke said on July 17 the jobless rate isn’t the only measure of labor-market health.

The 10-year note yield will end the year a 2.64 percent, according to the median forecast in a Bloomberg News survey of analysts.

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