Treasuries Fall First Time in Four Days as Rally Seen Overdone

Treasury bonds fell for the first time in four days as traders speculate that the rally that pushed 30-year bonds to the best start of a year in almost two decades went too far too fast with the economy strengthening.

Yields on benchmark 10-year notes rose from the lowest level since October as a report showed the pace of housing starts accelerated more than forecast last month. The long bond has returned 13 percent this year through yesterday, the biggest return for that period since 1995. Bonds have rallied in the U.S. and Europe on speculation central bankers will maintain or add to the current pace of monetary stimulus.

“The risk reward tradeoff is far less appealing than when yields were higher,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “It’s hard to argue being long at these levels. The next move in yield is higher.”

Benchmark 10-year yields rose three basis points, or 0.03 percentage point, to 2.53 percent as of 5:05 p.m. in New York, based on Bloomberg Bond Trader prices. The 2.5 percent note maturing in May 2024 dropped 8/32, or $2.50 per per $1,000 face amount, to 99 26/32. The yield fell to 2.47 percent yesterday, the lowest since Oct. 30.

Thirty-year bond yields increased two basis points to 3.34 percent. The yield dropped to 3.30 percent yesterday, a level not seen since June. This year’s long-bond rally compares with a 15 percent loss for all of 2013, according to Bank of America Merrill Lynch indexes.

Consumer Confidence

Government debt pared losses after a report showed the Thomson Reuters/University of Michigan preliminary index of sentiment was 81.8 this month, below the 84.5 median forecast of economists in a Bloomberg News survey.

Treasuries earned 3.3 percent this year through yesterday, according to the Bloomberg U.S. Treasury Bond Index, trailing the Bloomberg Global Developed Sovereign Bond Index, which returned 4.4 percent in the same period.

“The market is very gun shy to make a big push for higher yields,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 22 primary dealers that trade with the Federal Reserve. It’s not clear that the rally momentum is over.’’

Ten-year notes are close to the most expensive level against 2- and 30-year debt since November, according to a butterfly chart spread. The index, which measures how the 10-year is performing against the other two securities, is at 132 basis points, after falling to 129 basis points yesterday. A lower reading indicates the market is bullish on the 10-year note, while a higher number signals investors are more bearish on the middle of the three securities.

‘Deeply Overbought’

‘Daily and weekly momentum is now deeply overbought,’’ Gabriel Mann, a strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, another primary dealer, wrote in a note to clients, citing technical analysis. “On the other hand, positioning is still short, so there clearly is bandwidth for a continued move lower in rates.”

Hedge-fund managers and other large speculators increased so-called net long positions in 30-year bond futures in the week ending May 13, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 62,677 contracts on the Chicago Board of Trade. Net-long positions rose by 27,000 contracts, or 76 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Fed Chair Janet Yellen said yesterday the U.S. economy has further to go to achieve full health.

Yellen said last week the U.S. economy still needs help from the Fed. While the central bank is unwinding the bond purchases it has used to fuel growth, it has kept its benchmark interest rate close to zero since 2008.

Central Bankers

Bank of Japan Governor Haruhiko Kuroda said yesterday the BOJ has many options to “ease monetary conditions” if necessary.

European Central Bank President Mario Draghi signaled last week officials are ready to reduce interest rates in June if needed. Bank of England Governor Mark Carney indicated this week policy makers may not raise U.K. borrowing costs until 2015.

The pace of U.S. home construction jumped in April to its highest level since November, exceeding all analysts’ forecasts and showing builders returned to sites after freezing temperatures restrained work earlier this year.

Housing starts climbed 13.2 percent to a 1.07 million annualized rate following March’s 947,000 pace, the Commerce Department reported today in Washington. The median estimate of 79 economists surveyed by Bloomberg called for 980,000. Permits for future projects increased, a sign activity might accelerate in coming months.

“Housing starts were really good, that was the precursor of why we are up,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “We’ll have a difficult time getting to 2.48 percent on 10s.”

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