Treasuries Fall on Stronger U.S. Data, Joining Global Selloff

Updated on
  • Declines pared in late trading as U.S. equities drop
  • TIPS outperform after strong demand for 10-year TIPS auction

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Treasuries fell, led by 10-year debt, as a stronger-than-expected slate of U.S. economic data pushed yields to the highest in two weeks.

The figures included an unexpected increase in the Philadelphia Fed Business Outlook Index to a two-year high and an initial jobless claims tally near generational lows. An auction of Treasury Inflation-Protected Securities drew strong demand, and nominal 10-year debt recovered from the weakest levels of the day amid declines in U.S. stocks.

The 10-year yield was higher by about four basis points at 2.47 percent at 3:30 p.m. in New York after rising as much as 6.5 basis points to 2.494 percent, its highest since Jan. 3. In futures, the 10-year contract stabilized after trading below 123-30, marking a 50 percent retracement of its rally from the post-FOMC lows on Dec. 15. Most developed-market 10-year yields closed higher by 2-5 basis points.

  • Declines sparked by U.S. data also including bigger-than-forecast increase in December housing starts pushed the 5s30s yield curve toward its lowest levels of the past several months 
  • Subsequent declines steepened the curve, which had flattened by more than 4bp on Wednesday after Fed’s Yellen said she agreed with the Federal Open Market Committee’s median estimate, published Dec. 14, for “a few” rate increases per year through 2019
  • Domestic real-money buying in intermediates and central bank buying in front-end emerged in late morning near the lows, which stemmed further downside
  • Nominal yields peaked -- while TIPS yields erased increases -- after the $13 billion TIPS auction was awarded at 0.436 percent vs WI yield of about 0.465 percent at 1 p.m. bidding deadline, for the biggest stop through by a 10-year TIPS auction since March 2015, according to Stone & McCarthy
  • Bidder-participation metrics also reflected strong investor demand for inflation protection; indirect bidders were awarded a record 77.1 percent, leaving primary dealers with 15.9 percent, their lowest share on record
  • Despite carrying the highest inflation break-even rate since 2014, 10-year TIPS benefited from strong flows into the asset class based on expectations for fiscal stimulus; MORE 
  • During the session, Treasury Secretary-nominee Mnuchin in Senate confirmation hearings said he wants the U.S. debt ceiling raised “sooner rather than later,” a policy decision that will affect the Treasury issuance calendar this year; MORE
  • In futures, open interest changes in 5-year dropped following Yellen remarks Wednesday, while rest of the curve rose; OI also rose across eurodollars following Wednesday’s heavy volume-based selloff

— With assistance by Edward Bolingbroke, and Brian Chappatta

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