Treasuries Drop as U.S. Jobless Claims Decline to 8-Year Low

Treasuries declined, with 10-year yields rising for a second day, as a report showed U.S. jobless claims unexpectedly fell to the lowest level in more than eight years, damping demand for the safest assets.

The benchmark 10-year yield climbed from almost the lowest since May as investors assess the Federal Reserve’s plans to raise interest rates next year. Reports indicated euro-area manufacturing and services grew while a gauge of Chinese factory activity rose to an 18-month high in July. The U.S sold $15 billion of 10-year Treasury Inflation Protected Securities at the lowest yield since May 2013.

“We’ve sold off a bit with better-than-expected claims data weighing on Treasuries,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market continues to point to higher yields, but we are solidly within the range for now. We won’t escape it without a material shift in the data that will alter people’s perception of the pace of Fed tightening.”

The U.S. 10-year yield rose four basis points, or 0.04 percentage point, to 2.50 percent at 5:04 p.m. New York time, according to Bloomberg Bond Trader data. The 2.5 percent note due May 2024 fell 10/32, or $3.13 per $1,000 face amount, to 99 31/32. The yield fell to 2.44 percent on July 17, the least since May 29.

Market Prices

The 30-year yield increased three basis points to 3.30 percent. It slid to 3.24 percent on July 21, the lowest level since June 7, 2013.

Treasuries gained 3.6 percent this year, after losing 3.4 percent last year, according to the Bloomberg US Treasury Bond Index.

“The 10-year note still seems to want to hover around 2.50 percent,” Kevin Giddis, senior managing director and head of fixed income in Memphis at Raymond James & Associates Inc., wrote in a note to clients. “The market remains hyper-focused on what the Fed might or might not do.”

The TIPS auction, which sold at a yield of 0.249 percent, saw investors bid $2.49 for every dollar of the securities sold, versus an average $2.56 percent in the past 10 auctions. Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

Auction Detail

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.3 percent of the sale, the highest since November. Indirect bidders, a class of investors that includes foreign central banks, purchased 53.1 percent of the offering, the lowest level since March.

Investors are stepping up their buying of exchange-traded funds that hold Treasuries tied to cost-of-living increases, data compiled by Bloomberg show. Net purchases of the 12 ETFs that hold U.S. inflation-linked bonds in July have totaled $194 million, more than triple the $60 million that has flowed into conventional government bonds this month.

The Treasury announced it will sell $29 billion in two-year notes on July 28, $35 billion in five-year notes on July 29 and $29 billion in seven-year notes on July 30. It will also sell $15 billion in two-year floating rate debt on July 30.

Treasuries lost support as jobless claims fell by 19,000 to 284,000 in the week ended July 19, the fewest since February 2006 and lower than any economist surveyed by Bloomberg forecast, a Labor Department report showed.

Economic Activity

A purchasing managers’ index for the euro-region’s manufacturing and services industries jumped to 54 this month from 52.8 in June, matching a three-year high reached in April. In China, a preliminary factory PMI from HSBC Holdings Plc and Markit Economics was at 52.0, topping the 51.0 median estimate in a Bloomberg News survey. Numbers above 50 indicate expansion.

“We were overbought in the long end of the yield curve and had a bit better data with the weekly-claims number that put further pressure on Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “There is a lot of apathy for the near future with the Fed expected to stay put for the time being. Barring a big uptick in economic activity there is no reason to trade too far from these levels.”

Global growth is still weak, according to the International Monetary Fund which lowered its outlook for global growth this year as expansions weaken from China to the U.S. and military conflicts raise the risk of a surge in oil prices.

The world economy will advance 3.4 percent in 2014, the IMF said, less than its 3.6 percent prediction in April and stronger than last year’s 3.2 percent. Next year growth will be 4 percent, compared with an April forecast for 3.9 percent, the fund said.

Fed View

Traders see about a 48 percent chance the Fed will have raised its target for overnight lending between banks to at least 0.5 percent by the end of June from almost zero now, based on futures contracts.

Fed Chair Janet Yellen said last week U.S. interest rates will probably stay low for a “considerable period” after the central bank ends the bond-buying program it has used to support the economy. The central bank may conclude its debt purchases after its October meeting, she said.

The gap between five-year notes and 30-year bonds, known as the yield curve, was at 160 basis points. It touched 157 basis points on July 22, the least since February 2009. A yield curve is a chart showing rates on bonds of different maturities.

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