MW: Treasury extend after worst drop since October
Technical, seasonal factors weighing on U.S. debt, analysts say
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Long-term Treasury prices turned down on Thursday after mixed economic data, extending the worst two-day increase in yields since October, while short-term yields gave back some of the recent rise.
Yields on 10-year notes 10_YEAR +0.22% , which move inversely to prices, turned back up 1 basis point to 2.29%, after touching 2.34% before U.S. trading began. A basis point is one-hundredth of a percentage point.
Yields on 30-year bonds 30_YEAR +0.09% rose 1 basis point to 3.42%, after touching 3.47% earlier.
Yields on 5-year notes 5_YEAR -0.45% edged up 1 basis point to 1.11%.
Prices on shorter-dated securities rose slightly, with 2-year note yields 2_YEAR -6.97% slipping 2 basis points to 0.38%, after closing Wednesday at their highest level since July.
U.S. data has been improving and can continue to show the economy is stabilizing, said Sharon Stark, fixed-income strategist at Sterne Agee. But that doesn’t mean growth is accelerating and everything is OK in the world.
Rates may continue to rise but there is a cap,” she said, which will come from worries about Europe and the need to deal with the U.S. fiscal deficit and tax policy by the end of the year.
“We’re going to see a retracement,” she said, which could leave 10-year yields between 2.10% and 2.30%. “We’ve seen the lows in Treasury yields for the year.”
On Wednesday, long-term yields saw their biggest one-day increase since October. Read about bond selloff Wednesday.
“U.S.Treasury yields had a seismic break and have finally moved this week, and boy did they move,” said George Goncalves, head of U.S. rates strategy at Nomura Securities. “The market blew through the range it had held for the past four months, our near-term targets and through several important technical levels.”
“This move is actually a correction and realignment to fundamentals,” he said, referring to the very narrow range that yields have stayed within during recent months as stocks rose alongside improving peripheral European debt markets.
Bond prices turned up briefly after the Philadelphia Federal Reserve reported that manufacturing activity in its region rose this month. See more on Philly Fed index.
Analysts noted details of the report offered softer implications for the nationwide ISM manufacturing reading.
Treasury prices had remained lower in early U.S. trading after a pair of reports showed weekly initial jobless claims fell more than forecast and a survey of New York area manufacturing unexpectedly rose. See story on jobless claims. Read about New York factory index.
Surveys of investors have shown that they have been relatively short on bonds, meaning positioned for declines in prices, said CRT Capital Group strategists. Still, the move in recent days is probably many traders getting shorter, they wrote in a morning note.
Still, the move may be more about those technical considerations than a vast change in the outlook for interest rates, CRT’s David Ader and Ian Lyngen wrote in a note. The Federal Reserve may still have a “relatively low bar” for initiating another round of bond purchases, sometimes dubbed quantitative easing.
“We grant the data is better, absolutely, but between higher rates and higher oil it would seem the fragility of the recovery should make us a bit more sensitive to these things,” Ader and Lyngen wrote.
“While the range may have ratchet up to, say, 2% to 2.50% in 10-year yields, we still are committed to range concepts.”
They also note that seasonal factors are very strong during this time of year, with yields tending to rise in months leading up to the Treasury Department’s debt refunding in May. Additionally, Japan’s fiscal year-end is approaching and many firms tend to sell foreign assets to repatriate profits.
