Treasuries Decline From Five-Week High Before Yellen Testifies

Treasuries dropped from almost a five-week high before Federal Reserve Chair Janet Yellen testifies to lawmakers in Washington tomorrow as investors seek clarity on the central-bank’s plans to scale back monetary stimulus and raise interest rates next year.

Benchmark 10-year yields rose for the first time in six days before reports forecast to show increases in retail sales and industrial production, adding to signs the economy is gaining traction. U.S. debt fell amid speculation Portugal will be able to contain financial woes among its banks.

“The Fed seems to be divided in a lot of ways,” said Kevin Giddis, senior managing director and head of fixed income in Memphis at Raymond James & Associates Inc. “The surprise that would not be good for prices is if Yellen plays it closer to the middle of her own committee.”

The benchmark 10-year yield added three basis points, or 0.03 percentage point, to 2.55 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note due in May 2024 fell 1/4, or $2.50 per $1,000 face amount, to 99 18/32. The yield touched 2.49 percent on July 10, the lowest since June 2.

Bond Returns

The Bloomberg U.S. Treasury Bond Index has gained 3.3 percent this year, after dropping 3.4 percent last year. The Bloomberg Global Developed Sovereign Bond Index has returned 5 percent this year, compared with 7.6 percent for the Standard & Poor’s 500 Index of stocks.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, fell to 54.42. The index reached 52.74 on June 30, the lowest level since May 9, 2013.

Hedge-fund managers and other large speculators increased bets on a decline in 10-year notes in the week ending July 8, according to U.S. Commodity Futures Trading Commission data. Speculative net-short positions, or bets prices will fall, rose to 97,772 contracts, from 69,358 the week before.

Speculators reversed positions in futures on Treasury bonds to a 4,357 net-short position, compared with a 17,737 net-long position the previous week, CFTC data show. It was the largest net-short since October.

Economic Watch

U.S. retail sales rose 0.6 percent in June from the prior month, after gaining 0.3 percent in May, based on a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. Industrial production advanced 0.3 percent, following a 0.6 percent increase, a separate survey shows. The Fed is scheduled to issue the report July 16.

“There’s an expectation that data for this week is going to be fairly good,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that are obligated to bid at U.S. debt sales. There is a risk that Yellen is “somewhat dismissive about the recent improvement in the data.”

Yellen characterized the recent rise in the consumer price index as “noisy” at her June 18 press conference. The CPI rose 2.1 percent in May from the year before, the most since October 2012, Labor Department data show.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.25 percentage points. The average for the past decade is 2.20.

Congressional Hearing

Yellen will deliver semi-annual monetary policy testimony to the Senate Banking Committee tomorrow and to the House Committee on Financial Services the next day.

Given “stable and improving growth anecdotes, people are expecting Yellen to be more optimistic than she’s been in the past,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Investors see about a 71 percent chance the central bank will increase its key rate by September 2015, futures contracts show. The central bank has kept its target for the benchmark, the rate banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.

Treasuries rose last week, with the 10-year yield dropping the most since March, as Banco Espirito Santo SA roiled markets after parent company Espirito Santo International SA missed some payments on commercial paper. The bank appointed Vitor Bento to be chief executive officer at a meeting yesterday after the Portuguese central bank urged the country’s second-biggest lender by market value to make changes to its executive management earlier than previously planned.

Portugal Bonds

Portugal’s 10-year bond yield dropped six basis points to 3.81 percent after rising 28 basis points in the five days through July 11.

The intensifying debate about when the Fed raises interest rates is little more than a sideshow when it comes to the ability of the U.S. to borrow.

For all the concern fixed-income assets will tumble once the central bank boosts rates, the Treasury Department still managed to get investors to submit $3.4 trillion of bids for the $1.12 trillion of notes and bonds sold this year, according to data compiled by Bloomberg. That represents a bid-to-cover ratio of 3.06, the second-highest on record and up from 2.88 in all of last year.

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