NASDAQ: U.S. Government Bonds Pull Back on Consumer Spending Data
U.S. government bonds pulled back on Thursday as an upbeat U.S. consumer spending report and a looming new debt auction dented demand for haven assets.
Thursday's report showed consumer spending gained 0.9% in May, the biggest monthly increase since 2009. It is the latest signal that consumption is springing back after a soft patch earlier this year, boosting the growth outlook.
In recent trading, the yield on the benchmark 10-year Treasury note was 2.405%, compared with 2.371% on Wednesday, according to Tradeweb. Bond yields rise as prices fall.
A $29 billion sale of seven-year notes is due at 1 p.m. EDT Thursday, the last leg of this week's new U.S. government note supply.
Treasury bonds have lost ground this quarter after a rally during the first three months of the year.
Indicators over the past few months have showed an improving economic outlook in both the U.S. and the eurozone, while fears over deflation risks have diminished. That has soured demand on bonds after a strong price rally since the start of 2014.
"U.S. growth is picking up and Europe doesn't seem to be a basket case, " causing the bond market to adjust, said Donald Ellenberger, head of multisector strategies at Federated Investors Inc., which had $355.8 billion assets under management as of March 31.
Many investors have been shedding bondholdings to prepare for the Federal Reserve's pending shift away from its ultra-loose monetary policy. The Fed is prepared to raise benchmark short-term interest rates for the first time since 2006. Investors are concerned that tightening monetary policy would send interest rates broadly higher, shrinking the value of outstanding bonds.
The yield on the 10-year Treasury note has climbed from 1.93% traded at the end of March. It touched 2.5% on an intraday basis earlier in June for the first time since September.
The Fed has signaled a cautious stance in raising rates as inflation remains subdued. Thursday's data showed the Fed's favored inflation gauge remained below the 2% target for the 37th consecutive month.
The price index for personal consumption expenditures grew 0.2% from May 2014. Core prices, which exclude food and energy costs, increased 1.2% from a year earlier, slipping from 1.3% in April and 1.4% in March.
Meanwhile, investors continue to keep an eye on Greece's debt crisis which has generated price swings in the financial markets over the past few weeks.
Negotiations between Greece and its international creditors continue. The clock is ticking as the current bailout funding will expire at the end of this month, leaving cash-strapped Greece vulnerable to default.
Investors are worried a default could threaten the stability of the financial system in the eurozone, jeopardize the region's economic growth and spark broad market turmoil.
Analysts say uncertainty over Greece has been one of the factors driving the Federal Reserve to remain cautious regarding the timing to raise interest rates. Should a deal be reached and Greece no longer post a near-term threat to financial markets, it could remove a hurdle for the Fed to raise rates as soon as September if economic data in coming months support such a move.
The Fed signaled after its monetary-policy meeting last week that the pace of tightening would be slower than it had projected in March. Money managers and market analysts say this go-slow approach would prevent Treasury bond yields from rising significantly from here.
Many big banks expect the 10-year Treasury yield to stay below 3% this year.
Goldman Sachs Group Inc's rate strategists expect the 10-year yield at 2.75% at the end of December. J.P. MorganChase & Co. expects 2.55%, Morgan Stanley predicts 2.4% and Bank of America forecasts 2.35%.
