Treasuries Tumble, Pushing 10-Year Yields Up Most Since April

Predicting mortgage interest rates is a challenging proposition (if accuracy matters to the forecaster!). The 10-year Treasury Bond is a major key.  As this article says, "we're on a knife's edge."  But are we, or is that only in the short term?  It's difficult to imagine a scenario that would not have rates increasing from their current levels in the coming years. - David

July 10 (Bloomberg) -- Treasuries fell for the first week in a month, pushing 10-year yields up the most since April as concern eased the U.S. will slide back into recession and the government prepared to auction $69 billion of notes and bonds.

The 30-year bond yield rose above 4 percent and the 10-year yield exceeded 3 percent for the first time this month as stocks and commodities climbed, damping bonds' haven appeal. A report next week is forecast to show a U.S. retail sales decline slowed last month, adding to data that showed unemployment claims down and wholesale inventories up.

"We're seeing a move toward riskier assets," said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. "There's a feeling that the pessimism was overdone."


The 10-year note yield rose 8 basis points yesterday, the most since the five days ended April 2, to 3.05 percent, from 2.98 percent on July 2, according to BGCantor Market Data. It dropped to 2.8793 percent on July 1, the lowest level since April 2009. The price of the 3.5 percent security due in May 2020 fell 23/32, or $7.19 per $1,000 face amount, to 103 23/32.

The 30-year bond yield climbed 9 basis points to 4.04 percent. Two- and three-year note yields were little changed at 0.63 percent and 1.01 percent, respectively.

Bets Reversed

Hedge-fund managers and other large speculators reversed from a net-long position to a net-short position in two-year note futures in the week ended July 6, U.S. Commodity Futures Trading Commission data showed yesterday. Short positions, or bets prices will fall, outnumbered long positions by 34,266 contracts on the Chicago Board of Trade. It was the first net- short position since January 2009.

"Gauging a recovery is difficult," said William Larkin, a fixed-income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million. "Things always improve, but it's the timing that's the hard part."

Labor Department data on July 8 showed initial unemployment-benefit claims fell to 454,000 last week, more than forecast, after a report July 2 showed payrolls dropped in June. Commerce Department data yesterday showed inventories at U.S. wholesalers rose in May for a fifth month. Retail sales declined 0.3 percent in June, after a 1.2 percent drop in May, according to a Bloomberg News survey before a government report July 14.

The Standard & Poor's 500 Index rallied 5.4 percent for the week, the biggest gain in a year. Crude oil for August delivery climbed 5.5 percent on the New York Mercantile Exchange.

"We're on knife's edge," said Christian Cooper, senior rates trader in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Federal Reserve. "There's a little bit of optimism, but we could go back to a concern about a double-dip if we have consistent misses on earnings or a surprise out of Europe."

Fed Minutes

Fed policy makers on July 14 will release minutes of their rate meeting last month. The central bank cited slowing inflation in its June 23 policy statement while reaffirming it foresees a "moderate" pace of growth. It said "financial conditions have become less supportive of economic growth on balance, largely reflecting developments from abroad" and held the benchmark interest rate at a record low.

"We will be looking for any further signs of concern around European sovereign-debt issues spilling over into the U.S. economy," among other things, Joseph LaVorgna, New York- based chief U.S. economist at primary dealer Deutsche Bank AG, wrote in a note to clients yesterday.

Inflation Bets Rise

Traders added the most to inflation bets in six weeks. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened by 8 basis points to 1.84 percentage points in the biggest increase since the week ended May 28.

The Treasury will auction $35 billion of three-year notes on July 12, $21 billion of 10-year debt the following day and $13 billion of 30-year bonds on July 14.

The U.S. attracted more bids than average at a record-tying $12 billion auction of 10-year TIPS on July 8. The sale drew a yield of 1.295 percent, and the bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.88, versus an average of 2.45 for the previous 10 sales.

Ten-year yields will increase to 3.37 percent by year-end, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

'Fed on Hold'

"While the longer end has traded weaker the last two days on equity strength, there has been no reversal yet of the new consensus for the Fed on hold into 2011," Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients yesterday.

Traders reduced bets Fed policy makers will raise borrowing costs by their December meeting, according to futures on the CME Group Inc. exchange. The probability fell to 14 percent yesterday, from 29 percent a month ago.

Treasuries returned 5.9 percent in the first six months of 2010, the most since 1995, according to Bank of America Merrill Lynch indexes. Investors snapped up government debt on speculation efforts by European governments to cut spending would slow global economic growth.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net ; Daniel Kruger in New York at dkruger1@bloomberg.net
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