Treasuries Decline as New-Home Construction Climbs in September

  • Yields rise as housing starts signal U.S. economic strength
  • Treasury 4-week bills sell at highest rate since February 2014

Treasuries fell after a report showed new-home construction rose in September, as investors look for signs the Federal Reserve may deem the U.S. economy strong enough to raise interest rates.

Yields on benchmark Treasury 10-year notes rose to a one-week high as housing starts increased 6.5 percent in September, beating forecasts and reaching the second-highest level in eight years. It’s a signal residential real estate may bolster the world’s largest economy, even as a drop in building permits indicates a rebound will be slow to materialize.

"The data was quite good, but I think the market just really largely drifted into and out of the data," said Gennadiy Goldberg, an interest-rates strategist in New York with TD Securities. "It’s been very quiet, not a whole lot of conviction and momentum."

The yield on 10-year Treasury rose four basis points, or 0.04 percentage point, to 2.07 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security maturing in August 2025 fell 3/8, or $3.75 per $1,000 face amount, to 99 12/32.

Bill Auction

The probability that the Fed will raise interest rates by the end of this year was at 32 percent, about half the odds from before the Sept. 17 Federal Open Market Committee decision, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

“The big mover is what the Fed’s going to do, that’s at the back of everyone’s mind; every time economic data comes out everyone thinks ‘Is that big enough to move?’" said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “I would wait for th market to back up some more and then I might be a buyer. I don’t think the Fed’s going to move for quite some time and inflation is low."

Fed Governor Daniel Tarullo, who votes on rate decisions, said last week that he doesn’t currently favor an interest rate hike in 2015 after several Fed officials -- including Fed Bank of New York President William C. Dudley -- said the central bank would still increase rates this year as long as the economy stays on track.

“We’ve seen this difference of opinion at the Fed, and that discussion, which is taking place out in the market, has created a lot of uncertainty,” said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. “It means more uncertainty, which means more volatility."

Rates at the Treasury’s auction of $5 billion of four-week bills rose to 0.12 percent, the highest since February 2014, as investors demanded a premium for the risk that the government won’t be able to make good on the obligations if Congress can’t reach a compromise to lift or suspend the debt limit.

Tuesday’s sale matched the smallest since the four-week bill was reintroduced in July 2001. In the prior five auctions the rate came at zero percent, the least allowed by Treasury rules, amid a supply shortage as the government cut the amount issued as part of maneuver to stay under its statutory debt limit.

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