Treasuries Fall on Economic Growth Signs Before Yellen Testimony

Treasuries fell for a second day as a report showed retail sales may contribute to a second-quarter economic revival before Federal Reserve Chair Janet Yellen testifies in Congress about monetary policy.

Benchmark 10-year yields rose from almost the lowest level in six weeks as investors await clues from Yellen about the central bank’s plans to scale back monetary stimulus and raise interest rates next year. Futures prices show a 71 percent chance the central bank will raise its key rate by September 2015.

“The June numbers were a small miss, but there were actually pretty healthy upward revisions to the previous data,” said John Briggs, a U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. “With Yellen at 10 a.m., I don’t think you want to overreact now and take any large positions ahead of that.”

The 10-year note yield rose one basis point, or 0.01 percentage point, to 2.56 percent at 9:10 a.m. New York time, according to Bloomberg Bond Trader prices. The yield climbed three basis points yesterday, the steepest advance since July 2. The price of the 2.5 percent note due in May 2024 was at 99 1/2.

The benchmark note rate reached 2.49 percent on July 10, the least since June 2.

Bond Returns

The Bloomberg Global Developed Sovereign Bond Index has returned 4.9 percent this year, erasing a loss from 2013. Treasuries have gained 3.2 percent this year, the Bloomberg World Bond Indexes show.

Yellen will deliver her semi-annual monetary-policy testimony to the Senate Banking Committee today and to the House Financial Services Committee tomorrow. The central bank has kept its target for the key rate in a range of zero to 0.25 percent since December 2008.

“We expect her to be pretty dovish,” said Ali Jalai, a bond trader in Singapore at Scotiabank, a unit of Bank of Nova Scotia, a primary dealer. “She could say she doesn’t know when they’re going to raise rates; it’s data-dependent. She’s going to err on the side of not raising interest rates.”

Yellen said last month that prices have continued to run below the central bank’s 2 percent target and that a low inflation rate “could pose risks to economic performance.”

Treasuries Demand

Hajime Nagata, a money manager in Tokyo at Diam Co., said he expects a period of stability for Treasuries as investors will want U.S. debt because it yields more than the bonds of other countries.

Treasuries yield 70 basis points more than their Group-of-Seven peers on average, according to data compiled by Bloomberg. The spread was as much as 73 basis points earlier in July, the most in more than four years, according to closing-price data.

Investors who hold the bonds will benefit as the securities approach maturity and are valued at successively lower yields and higher prices, known as a “roll down” strategy, according to Nagata. Diam manages the equivalent of $138.5 billion.

The five-year, five-year forward break-even rate climbed to 2.51 percentage points in the most recent reading, from July 10, the highest level since Feb. 12. The index, which measures inflation expectations for the five years starting in 2019, has climbed from this year’s low of 2.38 percentage points set on March 21.

‘Noisy’ Data

It compares with a five-year average of 2.73 percentage points. In 2013, the measure ranged between 2.33 percentage points and 2.89 percentage points.

Recent inflation data, while “noisy,” suggest that consumer prices “are moving back gradually over time toward our 2 percent objective,” Yellen said in June.

Retail sales increased 0.2 percent in June after a 0.5 percent advance in May that was larger than previously reported, Commerce Department figures showed. The reading fell short of the 0.6 percent increase projected by the median estimate of 83 economists surveyed by Bloomberg, restrained by a drop among auto dealers.

Gross domestic product expanded 3.3 percent at an annual rate in the second quarter, according to the median forecast in a Bloomberg News survey of economists. GDP contracted at a 2.9 percent rate in the first quarter, the worst performance since 2009.

“It’s the continuation of the grind -- we’re not seeing the economic vitality that everybody’s been waiting for after such a sharp economic downturn,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. Yellen “will reiterate they’re on sure footing to keep quantitative easing on track to end in October,” he said.

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