Treasury 10-Year Notes Drop for Fifth Day as Manufacturing Grows
July 02, 2011, 1:47 PM EDTBy Daniel Kruger
July 1 (Bloomberg) -- Treasuries fell, pushing 10-year note yields to the highest level since May, after a report showed manufacturing unexpectedly expanded last month at a faster pace, reducing concern the economic recovery is stalling.
Benchmark 10-year notes slid for a fifth straight day and had their steepest weekly loss in almost two years as Greece may receive a second bailout to avoid default after lawmakers approved budget cuts. U.S. debt was routed this week as a total of $99 billion in notes sold in three government auctions produced poor demand.
“We’ve got to look carefully at the speed of moving back from the soft patch to expected growth,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “We do have good news on the EU political situation.”
Yields on 10-year notes rose three basis points, or 0.03 percentage point, to 3.19 percent at 4:12 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 dropped 9/32, or $2.81 per $1,000 face amount, to 99 13/32.
The 10-year note yields advanced earlier today to 3.22 percent, the highest level since May 19. They increased 33 basis points this week, the most since an advance of 37 basis points during the five days ended Aug. 7, 2009.
Two-year note yields were up three basis points to 0.49 percent after rising yesterday to 0.51 percent, the highest level since May 26. They had a weekly gain of 16 basis points in their first five-day increase since April 8. They dropped over the previous 11 weeks in longest stretch of decreases since September through November 1984, when the Fed had switched to cutting from raising interest rates.
‘Bearish Cast’
“If anything, the market has a little more bearish cast to it,” said James Collins, an interest-rate strategist in the futures group in Chicago at Citigroup Inc., one of the 20 primary dealers that trade with the Federal Reserve. “Next week, when we come back, we’ll probably resume the higher trend in yields, despite how fast yields have risen.”
Treasuries returned 2.4 percent in the second quarter after losing 0.1 percent in the first three months of the year, according to Bank of America Merrill Lynch indexes.
Bonds fell today as the Institute for Supply Management’s manufacturing index increased to 55.3 in June, from 53.5 in the previous month. The median forecast of 77 economists in a Bloomberg News survey was for a drop to 52. Figures greater than 50 signal expansion.
Break-Even Rate
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the next decade known as the break-even rate, increased to 2.41 percentage points after touching 2.42 percentage points yesterday, the widest spread since May 13.
Greece may receive as much as 85 billion euros ($124 billion) in new financing, including a contribution from private investors, in a second bailout aimed at preventing default and ending the euro-region’s debt crisis, according to an Austrian Finance Ministry official.
Euro-area nations and private investors will contribute 70 percent of that aid, with the International Monetary Fund offering the rest, Thomas Wieser, head of the ministry’s economic policy and financial markets department, said at a briefing yesterday in Vienna.
Prime Minister George Papandreou secured passage yesterday of 78 billion euros of additional budget cuts and revenue measures needed to meet the targets of the original bailout.
‘More Time’
“Greece certainly bought itself more time,” said Anthony Cronin, a trader in New York at Societe Generale SA, a primary dealer. “They’re not going to default, at least immediately. Now you can focus on the economics, and the economic news hasn’t been as disappointing as it was earlier in the month. If you see that continue, then the selloff can accelerate a little bit.”
U.S. President Barack Obama is trying to reach a compromise with opposition Republican lawmakers who are seeking spending cuts before they agree to raise the nation’s borrowing limit, currently capped at $14.3 trillion. The Treasury Department has said it has until Aug. 2 before its ability to pay the U.S. debt expires.
Treasury Secretary Timothy F. Geithner’s potential departure from the administration would force Obama to assemble a new economic team as he enters a re-election campaign that’s likely to be dominated by voter concern over jobs.
Geithner has told Obama that he’s considering leaving the administration after the president reaches an agreement on the debt limit, according to a person familiar with the matter.
“I live for this work,” Geithner said yesterday at the Clinton Global Initiative in Chicago. “It’s the only thing I’ve ever done. I believe in it. We have a lot of challenges as a country. I’m going to be doing it for the foreseeable future.”
Note Auctions
The $35 billion offering of seven-year notes held two days ago produced the lowest participation in more than two years from a class of investors including foreign central banks. The $35 billion government auction of five-year securities on June 28 drew the lowest demand in a year. A record low yield of 0.395 percent at the $35 billion offering of two-year notes a day before that drew the weakest demand from the group including central banks since February 2008.
Treasuries also fell this week as the Fed completed yesterday its $600 billion program of debt buying, which was aimed at capping borrowing costs. The central bank said following its June 21-22 policy meeting that it would maintain its policy of reinvesting principal payments from its securities holdings.
--With assistance from Hans Nichols in Washington. Editors: Dennis Fitzgerald
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
