Treasuries fell for a second day before an Institute for Supply Management report that economists predict will show U.S. manufacturing expanded last month, limiting demand for the safest assets.
U.S. government securities handed investors a loss of 2.5 percent in the first six months of 2013, the biggest decline since the first half of 2009, according to Bank of America Merrill Lynch data. Treasuries have fallen since Federal Reserve Chairman Ben S. Bernanke said on June 19 that policy makers may begin slowing bond purchases this year. A Labor Department report July 5 is forecast to show the U.S. added 165,000 jobs.
“There’s a little bit of optimism,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the Fed. “The big number will be payrolls. ISM could be a market mover if it’s well away from consensus.”
The benchmark 10-year yield climbed four basis points, or 0.04 percentage point, to 2.53 percent at 8:31 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 dropped 11/32, or $3.44 per $1,000 face amount, to 93 7/32.
The ISM’s factory index rose to 50.5 last month from 49 in May, which was the lowest since June 2009, according to a Bloomberg survey of economists before today’s report. A reading of 50 is the dividing line between growth and contraction. U.S. employers added 165,000 workers last month after hiring 175,000 in May, a separate survey showed before the Labor Department data on July 5.
“For Treasuries the U.S. data is crucial, and in particular payrolls, as the Fed made it quite clear that tapering will be contingent on the developments in the labor market,” said Michael Leister, an interest-rate strategist at Commerzbank AG in London. Better-than-expected factory and job numbers may push 10-year yields up to 2.70 percent, he said.
Treasury Secretary Jacob J. Lew said that while the U.S. economy probably won’t grow as fast as in the 1990s, he’s confident gross domestic product can accelerate more than it is now. Lew spoke yesterday at a conference in Aspen, Colorado.
The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to support the economy by putting downward pressure on borrowing costs. Bernanke said on June 19 the central bank could reduce its monthly purchases if the employment outlook shows sustained improvement.
Jobs data will be of “particular importance” to investors, Silvia Ardagna, an analyst at Goldman Sachs Group Inc., wrote in an e-mailed note today. The bank forecasts payrolls rose 150,000 last month, the report said.
“A report significantly stronger than the one we expect would put further pressure on intermediate maturity bonds and upward moves in interest rates might occur earlier than we currently expect,” Ardagna wrote. “The market may take a stronger-than-expected payroll report as confirmation that tapering will occur in the next few months, before December as we currently forecast.”
China is ready for the possible end of quantitative easing by the U.S. and has prepared plans on fund outflows, Oriental Morning Post reported, citing Guan Tao, an official of the State Administration of Foreign Exchange.
Even after recent yield increases, the Treasury 10-year rate is still about a percentage point below its decade average of 3.56 percent.
Investors who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world’s biggest fixed-income managers struggling to stem the flow.
The funds saw $61.7 billion of withdrawals as money market mutual-fund assets rose $8.17 billion in the week ended June 25, according to TrimTabs Investment Research and the Money Fund Report. Bank of America Merrill Lynch’s Global Broad Market Index dropped 2.9 percent in the past two months, the most since the inception of the daily gauge in 1996, as Bernanke laid out possibilities for reducing the $85 billion in monthly bond purchases supporting the economy.
Market bears say losses are just getting started because yields barely exceed inflation, leaving little relative value in bonds as the global economy improves. Pacific Investment Management Co., BlackRock Inc. (BLK:US) and DoubleLine Capital LP, which together oversee about $6 trillion in assets, said the worst is already over because the securities are fairly valued.
“We are at a definite inflection point,” Richard Schlanger, who helps invest $20 billion in fixed-income securities as a vice president at Pioneer Investments in Boston, said in an interview on June 28. “If this thing continues in this vein, people are going to throw in the towel and you’re going to get this pain trade. And the markets can’t take it. They’d rather see a gradual rise in short-term rates versus a precipitous rise.”
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