Treasuries Fall as Brexit Relief Damps Demand for Safest Assets

  • Improving outlook for U.S. economy aids risk sentiment
  • Ten-year yield climbed most last week since June 2015

Treasuries fell, extending last week’s biggest decline in a year, as a brightening U.S. economic outlook and political clarity in the U.K. following its vote to leave the European Union helped sap demand for haven assets.

Benchmark Treasury 10-year note yields approached a three-week high as Turkey’s President Recep Tayyip Erdogan regained control after Friday’s failed military coup against his government, curtailing demand for safety. U.K. Prime Minister Theresa May said she will make the case for Britain to remain a powerful player in the world after Brexit.

“We have been observing a slow consolidation after 10-year Treasury yields fell to record lows,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “This has been driven by, among other things, a general calmer take on the effects of Brexit. That helped risk assets and did some damage to Treasuries.”

U.S. 10-year note yields rose two basis points, or 0.02 percentage point, to 1.57 percent as of 10:15 a.m. New York time, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 fell 5/32, or $1.56 per $1,000 face amount, to 100 1/2.

Yields Climb

The 10-year yield climbed 19 basis points last week, the biggest increase since June 2015. It touched 1.60 percent Friday, the highest since June 24, having dropped to a record 1.318 percent on July 6. Citigroup Inc.’s U.S. Economic Surprise Index, which measures whether data beat or missed analysts’ forecasts, rose to the highest level since January 2015 at the end of last week.

Data last week showed U.S. retail sales rose more than forecast, while a core measure of price growth accelerated. That helped revive bets that the Federal Reserve will raise interest rates this year. The probability of a 2016 hike is 40 percent, according to futures pricing -- up from 29 percent a week ago, but still below the 50 percent chance seen when the U.K. voted on its EU membership on June 23.

Yields rose Monday even as a report showed confidence among U.S. homebuilders declined in July from a five-month high. Economic data this week are forecast to show housing starts rose in June after contracting in May and continuing claims on unemployment benefits dropped in a week ended July 9, according to Bloomberg surveys of analysts.

“If anything, we are now more convinced that the outlook for core government bond yields are asymmetrical to the upside,” said Russel Matthews, a money manager at BlueBay Asset Management LLP in London. “Bond markets face short- to medium-term challenges that are likely to see yields rise materially from current levels. These headwinds include better data out of the U.S. and valuations which are completely divorced from historical reality.”

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