MW: Treasurys hold losses as trade deficit increases
By Ben Eisen, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices mostly held losses Wednesday after a 13.3% jump in the trade deficit, as investors looked ahead to labor-market reports later in the week for more revealing signs of Federal Reserve monetary-policy changes.
The 10-year note 10_YEAR +0.14% yield, which moves inversely to price, rose 1 basis point to 2.863%, while the 5-year note 5_YEAR +0.48% yield rose slightly to 1.682%. The 30-year bond 30_YEAR -0.29% yield, however, fell half a basis point to 3.778%.
The trade deficit rose to $39.1 billion in July from $34.5 billion in June, a snap back after the Commerce Department reported the smallest gap since 2009 in the prior month. Economists had projected a deficit of $39 billion. While the slightly higher-than-projected deficit suggests slower GDP growth, the deficit is still down 10% from a year ago.
The release of the Federal Reserve’s Beige Book at 2 p.m. Eastern could fill in more of the picture of economic growth. The snapshot may answer the question of whether rising interest rates are cutting into national growth.
Nonetheless, the Beige Book is unlikely to provide any clues about the Fed’s thinking on when it will scale back the pace of monetary stimulus. Markets largely expect the Fed to announce at its September meeting that it will slow its $85 billion in monthly bond purchases, but the Fed has said any monetary policy action will be based on data.
One of the more closely-watched indicators of the Fed’s actions will be Friday’s nonfarm payrolls and unemployment report.
“Rate lock activity as the month of September and heavy corporate issuance unfolds explains some part of the jump in yields since late last week, while improving economic data and the approach of tapering explains the balance,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities, in a note. Friday’s payrolls report “will likely determine whether investors jump in or allow rates to continue to drift higher,” he said.
Treasurys briefly bounced higher Wednesday as President Barack Obama defended his rationale for engaging in limited military strikes on Syria. Investors bid up Treasurys last week as fears of an international conflict crested last week, but have largely unwound that safety bid as the time-frame for a potential strike, if approved by Congress, extends further out.
Treasurys fell Tuesday as receding fears of imminent action in Syria combined with positive economic data to raise uncertainty in the market. That combined with a hefty corporate new-issuance calendar to put pressure on prices.
The jump in yields continued a sharp climb for much of the summer that led to the longest rise in yields since early 2011. Morgan Stanley research analysts said Tuesday that given the bond selloff, it projects the 10-year Treasury note yield hitting 3.36% within a 12-month horizon.
The selloff also has investors continuing to pull money from bond funds. Two of the most watched funds experienced outflows in August, Morningstar data showed Wednesday. The Pimco Total Return Fund PTTRX -0.28% , run by bond guru Bill Gross, saw $7.7 billion leave the fund during August in its fourth month of outflows. The DoubleLine Total Return Bond Fund DBLTX -0.28% , run by Jeffrey Gundlach, also lost $1.1 billion in its third month of outflows.
Ben Eisen is a MarketWatch reporter based in New York.
