Treasuries Fall for Second Day on Housing, Confidence Strength

Treasuries fell for a second day, pushing 10-year yields up the most in one month, as a report showed housing starts rose more than forecast last month, damping concern the economy may need further stimulus.

The benchmark 10-year securities extended losses as consumer confidence in the U.S. unexpectedly rose in October to the highest level in seven years. U.S. government securities are headed for a weekly gain as concern global growth is losing momentum stoked bets the Federal Reserve will delay an interest-rate increase. Today’s rise in yields pared a move this week that sent 10-year yields to the lowest level since May 2013.

“As domestic numbers get better, it makes people feel better,” said Kevin Giddis, the Memphis, Tennessee-based executive vice president and head of fixed-income capital markets at Raymond James & Associates Inc. “We went through that period of time where it was a great scare in the market.”

U.S. 10-year yields climbed four basis points, or 0.04 percentage point, to 2.20 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.375 percent note due in August 2024 fell 11/32, or $3.44 per $1,000 face amount, to 101 18/32. The yield declined nine basis points this week and dropped to 1.86 percent on Oct. 15, the lowest since May 2013.

Futures Positions

Hedge-fund managers and other large speculators increased bearish bets on 10-year note futures to the most since May, according to U.S. Commodity Futures Trading Commission data. The number of net-short positions reached 123,168 contracts as of Oct. 14, an increase of 30,383 from the week before.

Treasury trading volume dropped to $423 billion, after reaching a record high $945.9 billion on Oct. 15, according to ICAP Plc, the world’s largest interdealer broker. Volume has averaged about $335 billion a day this year.

“The flight to safety has somewhat abated,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. “It’s a 2.10 percent to 2.30 percent market for the balance of the month. I don’t think 10-year notes get above 2.40 percent going into November, December.”

An average of bond yields on the Bank of America Merrill Lynch Global Broad Market Index was at 1.57 percent yesterday after dropping to 1.51 percent on Oct. 15, the lowest level in data starting in 1996.

Finance Stress

The Bloomberg U.S. Financial Conditions Index rose to 0.35 after falling below zero this week for the first time September

2012. The index combines 10 closely watched measures of market stress, including the so-called TED spread, which is the difference between what banks and the U.S. Treasury pay to borrow for three months, as well as gauges of the bond and equity markets.

Treasuries declined as demand for haven assets eased after central bankers in the U.S. and Europe reassured the market that they will continue to keep liquidity ample -- a factor which some investors judged as positive for higher-yielding securities.

Italian and Spanish bonds rose for the first time in three days after European Central Bank Executive Board member Benoit Coeure said today officials will start the next phase of asset buying in coming days. Stocks rose, with the Stoxx Europe 600 Index surging 1.5 percent.

Boston Fed President Eric Rosengren said he still expects the Fed to raise interest rates in 2015 and it’s too soon to make a judgment on the recent market turbulence.

“We should” consider a fourth round of government bond purchases if the economy gets weaker, he said in an interview today on CNBC.

Fed Policy

Futures show a 51 percent change the Fed will raise interest rates in October 2015. The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.

The Fed has expanded its balance sheet assets to $4.5 trillion from less than $1 trillion in 2008 in an effort to stimulate growth after the global financial crisis.

Housing starts climbed 6.3 percent to a 1.02 million annualized rate in September from a 957,000 pace in August, the Commerce Department reported. The median estimate of economists surveyed by Bloomberg called for 1 million.

The Thomson Reuters/University of Michigan preliminary sentiment index for this month increased to 86.4, the strongest since July 2007, from a final reading of 84.6 in September. The median projection in a Bloomberg survey of 67 economists called for 84.

“The pressure is likely to continue as long as economic data holds up,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “The fear that was dominating the price action has abated.”

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