Treasuries fell, pushing up yields the most in more than a month, as U.S. manufacturing grew the fastest in three years before a report that may show continued U.S. job growth and amid a wave of corporate-bond sales.
U.S. government securities dropped as companies were poised to conduct debt sales in the U.S. this month that Bank of America Corp. said may exceed $100 billion, keeping the market on pace for a third straight record year. Wells Fargo and Co. lowered its year-end yield targets after U.S. government debt posted the biggest rally in seven months in August amid geopolitical tensions from Ukraine to the Middle East, and speculation that the European Central Bank will expand monetary stimulus to revive inflation.
“This is very low yields with a lot of new supply and people being cautious in front of what could be some major data points,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “It’s a discount for all those things.”
The U.S. 10-year yield climbed eight basis points, or 0.08 percentage point, to 2.42 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2.375 percent note due August 2024 fell 22/32, or $6.88 per $1,000 face amount, to 99 19/32.
The gain in yield was the biggest since a 10-basis-point jump to 2.56 percent on July 30, after a report showed the economy grew faster than forecast in the second quarter and the Federal Reserve trimmed the monthly pace of bond purchases for the sixth consecutive meeting.
Yields on 30-year bonds climbed 10 basis points to 3.18 percent, the biggest advance since Nov. 20.
The government securities returned 1.3 percent in August, the best performance since January, based on the Bloomberg U.S. Treasury Bond Index. (BUSY) The 10-year yield tumbled to 2.30 percent on Aug. 15, the lowest since June 2013.
Treasuries resumed trading after being closed worldwide yesterday in observance of the U.S. Labor Day holiday.
Wells Fargo dropped its target year-end yield for 10-year notes to 2.75 percent-3 percent from 3.25 percent, and for 30-year bonds to 3.5 percent-3.75 percent from 4 percent.
“Lower rates have been driven by weak global growth, benign inflation and falling global interest rates,” Brian Rehling, chief fixed-income strategist at Wells Fargo wrote in a note today. “We expect these factors to persist through the end of the year.”
From grocer Safeway Inc. (SWY:US) to Australian mall owner Westfield Corp. (WFD), the anticipated rush to raise debt is the biggest acquisition boom since the credit crisis, as well as the opportunity to lock in near-record low yields while the rally that began in 2009 endures.
Company bonds returned 1.4 percent in August, more than recouping July’s 0.4 percent loss, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.
Stronger-than-forecast economic data provided “the fundamental backing for most of the down trade,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “From a flow perspective, we’re also hearing about the building corporate-issuance calendar which suggests there might be the need for some rate-lock selling and accommodation there.”
As companies sell debt, they enter into rate-lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, they end the wagers.
Issuance may face headwinds should there be an increase in geopolitical tension, which prompted investors to withdraw a record $7.1 billion from U.S. junk bond funds last month.
Bond yields across the euro area have tumbled, enhancing the appeal of payments available from Treasuries, since ECB President Mario Draghi said at the Fed Bank of Kansas City’s annual conference in Jackson Hole, Wyoming, on Aug. 22 that the central bank will use “all the available instruments needed to ensure price stability.” Officials are “ready to adjust our policy stance further,” he said.
“You’re still looking at yield levels that are very aggressively low, with global growth still in question and the ECB likely to deliver more stimulus in the near-term,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.
German 10-year bund yields fell to a record 0.866 percent last week and France’s declined to 1.217 percent. The ECB next meets on Sept. 4. The German yield climbed five basis points today to 0.93 percent while that on the French debt increased six basis points to 1.32 percent.
U.S. 10-year yields rose after the Institute for Supply Management’s index unexpectedly climbed to 59, the highest level since March 2011, from July’s 57.1, the Tempe, Arizona-based group reported today. Readings greater than 50 indicate growth. The median forecast in a Bloomberg survey of economists was 57.
A report Sept. 5 will show the U.S. added more than 200,000 jobs for a seventh month, based on the responses from analysts.
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