BLBG:Treasuries Head for Weekly Decline Before U.S. Confidence Report
Treasuries headed for a weekly decline before an industry report that economists said will show a gauge of U.S. consumer confidence was higher than initially estimated, adding to signs the recovery is gaining momentum.
Benchmark notes are poised to end two weeks of gains after the U.S. sold $99 billion of securities over the previous three days, including seven-year debt at the highest yield since July 2011. Analysts predict data next week will show American home prices rose at the fastest pace in seven years in May and the unemployment rate dropped this month.
“Data is getting a little better,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “Payrolls is the biggest event on the horizon. If we do have a robust number, people are going to look for higher rates, with the 10-year yield rising toward 2.75 percent.”
The U.S. 10-year note yield rose one basis point, or 0.01 poercentage point, to 2.58 percent at 8:18 a.m. in New York, according to Bloomberg Bond Trader data. The price of 1.75 percent note maturing in May 2023 was at 92 28/32. The yield has increased 10 basis points this week.
The Thomson Reuters/University of Michigan index of consumer sentiment was 84 in July, according to a Bloomberg News survey of economists before the release of the final reading today. That’s higher than the preliminary reading of 83.9 released on July 12, and compares with an almost six-year high of 84.5 in May.
‘Strong Concern’
“The momentum of the U.S. economy isn’t weak,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest lender by market value. “There is strong concern in markets about the risk of a further gain in yields.”
The S&P/Case-Shiller index of U.S. home prices rose 12.4 percent in May from a year earlier, which would be the biggest gain since February 2006, a separate Bloomberg survey showed before the report on July 30. The U.S. jobless rate fell to 7.5 percent in July from 7.6 percent in June, while payrolls climbed by 184,000, according to economists before the Labor Department releases the figures on Aug. 2.
“Even if the headline payroll gain is near consensus, the market is not accounting for the risk of a sudden drop in the unemployment rate,” Barclays Plc strategists led by Rajiv Setia in New York, wrote in a research note. “Investors should brace themselves for the likelihood of a further selloff.”
Yield on 10-year notes are likely to climb faster than those on 30-year bonds, the analysts forecast.
Volume Rises
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased to $352 billion yesterday, the highest level since July 17 and above this year’s average of about $320 billion.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index increased to 82.6 yesterday from 80.2 the previous day. The gauge has fallen from 117.89 on July 5, which was the highest since December 2010.
The seven-year notes auctioned yesterday drew bids for 2.54 times the $29 billion offered, the lowest since May 2009. The securities were sold at a high yield of 2.026 percent, up from 1.932 percent at the previous auction on June 27.
The Federal Reserve is scheduled to buy as much as $1.75 billion of Treasuries maturing in February 2036 to May 2043 today as part of its quantitative-easing program intended to stimulate growth through capping borrowing costs.
The Fed, which has been buying $85 billion of bonds each month, will probably start trimming purchases in September, according to a Bloomberg News survey.
Fed Meeting
The Fed’s Open Market Committee next meets to review policy on July 30-31. The central bank has kept its target for overnight bank lending in a range from zero to 0.25 percent since December 2008.
The FOMC said in a June 19 statement that leaving the federal funds rate in that range “will be appropriate at least as long” as unemployment remains above 6.5 percent and the forecast for inflation in one-to-two years doesn’t exceed 2.5 percent. Chairman Ben S. Bernanke said on July 17 the jobless rate isn’t the only measure to labor-market health.
“A further advance in yields will probably provide an opportunity to buy” Treasuries, Mizuho Trust’s Asaoka said. “Bernanke and other FOMC members are strengthening their message that they will keep market expectations in check for a rate hike, so it’s unlikely for yields to advance further.”
Treasuries handed investors a loss of 0.2 percent since the end of June, with the securities poised for a third monthly decline, the Bloomberg U.S. Treasury Bond Index (BUSY) shows. The MSCI World Index of shares has returned 5.9 percent in July, including reinvested dividends.
To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
