Treasuries fell as a report showed service industries expanded more than forecast in July, adding to signs the U.S. economy is improving and boosting speculation the Federal Reserve may reduce its stimulus program by year-end.
Benchmark 10-year notes slid for the past two weeks as traders bet growth is fast enough to allow the Fed to trim bond buying, even after data showed employers added fewer jobs than economists forecast last month. The unemployment rate dropped to the lowest level since 2008. Fed Bank of Dallas President Richard Fisher said the central bank is closer to slowing its purchase program. The U.S. is scheduled to sell $72 billion of three-, 10- and 30-year securities this week.
“The data continues to be supportive,” said Sean Murphy, a trader in New York at Societe Generale SA, one of the 21 primary dealers that trade with the Fed. “The drop in the unemployment rate keeps the tapering hopes alive for the September meeting.”
The benchmark 10-year yield rose four basis points, or 0.04 percentage point, to 2.63 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 fell 10/32, or $3.13 per $1,000 face amount, to 92 14/32.
Investors in U.S. government securities have lost 2.6 percent this year, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) U.S. debt gained 2 percent in 2012.
The Institute for Supply Management’s non-manufacturing index increased to 56 July from 52.2 the prior month, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey of economists called for a gain to 53.1.
“It’s really strong data,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 21 primary dealers that trade with the Fed. “The ISM suggests the economy in general is doing well. We’ll be setting up for the auctions this week. It probably will dictate we go a little bit higher from here.”
The U.S. is scheduled to sell $32 billion of three-year notes tomorrow, $24 billion of 10-year debt the next day and $16 billion of 30-year bonds on Aug. 8, raising $2.4 billion of new cash as investors will redeem $69.6 billion of securities.
“It’s all about the supply,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Will people view this as a buying opportunity or will they be concerned that we’re moving to higher rates?”
The Fed is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates. The central bank today purchased $1.5 billion in Treasuries maturing between February 2036 and November 2042. Policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.
The Fed’s Fisher, one of the most vocal critics of the central bank’s purchase program, known as quantitative easing, warned investors not to rely on that stimulus.
“Financial markets may have become too accustomed to what some have depicted as a Fed ‘put,’” or the idea that the central bank will loosen credit after a market decline, Fisher said in a speech in Portland, Oregon. “Some have come to expect the Fed to keep the markets levitating indefinitely. This distorts the pricing of financial assets” and can lead to “serious misallocation of capital.”
Fisher, who doesn’t vote on monetary policy this year, said in his prepared remarks that a decision to slow purchases is “closer to execution mode” with the unemployment rate having fallen last month to 7.4 percent.
The U.S. 10-year yield slid 11 basis points on Aug. 2 after the Labor Department said nonfarm payrolls increased 162,000 last month, compared with a median forecast for 185,000. The unemployment rate dropped from 7.6 percent.
Two years after Standard & Poor’s stripped the U.S. of its top rating, gross domestic product is forecast to grow 2.7 percent in 2014, the fastest of any Group-of-10 nation, surveys of economists by Bloomberg show. The budget deficit is the narrowest since 2008.
The spread between Treasury five- and 10-year yields was 1.24 percentage points, wider than that of higher-rated sovereigns, showing fixed-income investors anticipate the U.S. will grow faster than its peers, data compiled by Bloomberg show.
While an S&P managing director said in March other credit raters would “catch up” to its downgrade, the company and Moody’s Investors Service have since changed their outlooks to “stable” from “negative.”
“The U.S. is really leading the way in the developed world for recovery,” Kathleen Gaffney, a money manager in Boston for Eaton Vance Corp. (EV:US), which oversees $261 billion, said on Aug. 2 in a telephone interview. “We’re at an important inflection point where the economy really has the potential to pick up some steam.”
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