Treasuries Drop as Factory Data Spur Rate-Increase Bets
San Francisco (July 1) Yields on benchmark 10-year notes climbed from a three-week low reached June 27 as measures of U.S. manufacturing showed expansion in June, signs the economy is gathering pace after a first-quarter slowdown. BlackRock Inc., the world’s biggest money manager, forecast the first increase in borrowing costs for the second quarter of 2015. A report this week may show employers added more than 200,000 jobs for a fifth month.
“We’ve been seeing generally good signs of activity across the manufacturing sector,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that trade with the Fed. “Payrolls is the next big thing.”
The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.56 percent at 1:16 p.m. New York time, according to Bloomberg Bond Trader data. The figure compares with the average of 3.41 percent for the past decade. The 2.5 percent note maturing in May 2024 fell 1/4, or $2.50 per $1,000 face amount, to 99 15/32.
The Bloomberg U.S. Treasury Bond Index (BUSY) declined 0.1 percent in June. It gained 3.3 percent for the first half of 2014, reflecting a contraction in the economy from January through March. Treasuries due in 10 years or more gained 12 percent this year, according to the index, and those due in one to three years returned 0.4 percent.
Short Bets
Investors in Treasuries increased bets the prices of the securities would drop, according to a survey by JPMorgan Chase & Co. for the week ending yesterday.
The proportion of net shorts was 27 percentage points, according to JPMorgan, compared with net shorts of 21 percentage points in the previous week. Outright shorts rose to 38 percent from 34 percent, while outright longs dropped to 11 percent from 13 percent. Investors cut neutral bets to 51 percent from 53 percent.
U.S. government debt remained lower today as the Markit Economics index of U.S. manufacturing increased to 57.3 in June, the highest in more than four years, from 56.4 a month earlier, the London-based group said today. Readings exceeding 50 in the purchasing managers’ gauge indicate expansion. The median forecast in a Bloomberg survey of economists was 57.5, as was the preliminary reading.
GDP ‘Aberration’
The Institute for Supply Management’s manufacturing index was little changed at 55.3 in June from 55.4 in the prior month, the Tempe, Arizona-based group’s report showed today. The median forecast of 88 economists surveyed by Bloomberg called for 55.9.
“It’s all about the data,” said Ray Remy, head of fixed income in New York at primary dealer Daiwa Capital Markets America Inc. “The market is looking for some confirmation that first-quarter gross domestic product was an aberration and that second-quarter GDP is a real bounce-back.”
U.S. gross domestic product shrank at a 2.9 percent annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25. Harsh winter weather in early 2014 was blamed in part for the contraction.
BlackRock’s View
The Fed rate will probably be increased in the second quarter of next year, Stephen Cohen, BlackRock chief investment strategist for international fixed income, said in London today. The company’s view is not far from consensus and there would need to be a big improvement in U.S. economic data to change the market’s view, Cohen said.
The Treasury yield curve will steepen as data improves and consumer prices rise, he said at a media briefing. The yield curve is a chart showing rates on bonds of different maturities.
Traders see about a 54 percent chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, up from 43 percent odds at the end of May, Fed Funds futures show.
The gap between yields on U.S. two-year notes and 30-year bonds, was at 2.92 percentage points. It touched 2.86 percentage points on June 26, the least since May 2013.
“One may argue that the economic picture is still mixed and rates may stay low for longer, but the risk of Treasury yields rising is greater than them falling,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s corporate and investment banking unit in London.
The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.24 percentage points. The figure has risen from this year’s low of 2.10 in February and compares with the average for the past decade of 2.20.
Source: Bloomberg
