Treasuries Slump by Most in Six Weeks as Durable Goods Surprise

Treasuries suffered their biggest two-day tumble in six weeks as an unexpected jump in durable-goods orders and a recovery in stocks suppressed demand.

Losses deepened after an auction of five-year Treasuries drew the least interest since 2009, signaling that investors’ safe-haven appetite may have waned.

Debt found only temporary support after Federal Reserve Bank of New York President William Dudley said the case for increasing interest rates in September is less compelling because of worldwide market turmoil. Buyers demurred without evidence that the turbulence will slow the U.S. economy.

“There’s still too many distortions lingering from the last four or five days” to figure out the direction for Treasuries, said Jim Vogel, an interest-rate strategist with FTN Financial in Memphis, Tennessee. Consumer confidence data in coming days will give the first glimpse of whether the economy is feeling the pinch from the volatility, he said.

The benchmark U.S. 10-year note yield rose 10 basis points, or 0.1 percentage point, to 2.18 percent as of 4:59 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 dropped about 7/8, or $8.75 per $1,000 face value, to 98 13/32.

Yields on 10- and 30-year Treasury yields rose by a combined 17 basis points and 20 basis points over the past two days, respectively, their steepest increase since July 9-10.

Traders latched onto signs of economic strength in early New York trading. Orders for all durable goods -- items meant to last at least three years -- rose 2 percent, exceeding all forecasts of economists surveyed by Bloomberg, data from the Commerce Department showed.

Fed’s Tug

The freshest look at consumer confidence comes Aug. 28, with the University of Michigan consumer sentiment index for August. The measure probably improved to 93 from a preliminary reading of 92.9, according to the median forecast in a Bloomberg survey.

Traders have pared bets on higher interest rates amid losses in equities. The Fed has kept its target near zero since 2008. U.S. stock benchmarks rallied Wednesday.

“It’s the tug of war between the possibility of a Fed rate hike and uncertainty with the global slowdown,” said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “That’s driving the volatility.”

The chance of an increase in September has fallen to 24 percent, from the 40 percent probability seen at the end of July, according to futures data. The figures are based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Dudley’s Comments

“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley told a news conference at the New York Fed.

Yet he didn’t rule out a move.

“Normalization could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing, and more information on international and financial market developments,” he said.

Traders said the comments undermined longer-term debt because an accommodative Fed risks stoking inflation, the bane of the lengthiest maturities.

“When he said they’re less compelled to raise rates, that’s what set people off,” said Charles Comiskey, head of Treasuries trading in New York at Bank of Nova Scotia, one of 22 primary dealers that trade with the Fed. “It’s been very volatile.”

In Wednesday’s auction, five-year securities sold at a yield of 1.46 percent. The bid-to-cover ratio of 2.34 was the lowest since July 2009.

Before it's here, it's on the Bloomberg Terminal.