TREASURIES-Bond prices edge up on weaker economic data

Mon Aug 26, 2013 3:10pm EDT

Related Topics

* Durable goods orders fell 7.3 pct in July

* Business spending proxy down 3.3 pct

* Treasury to sell $98 billion of notes this week

By Ellen Freilich and Luciana Lopez

NEW YORK, Aug 26 (Reuters) - Prices of U.S. Treasuries rose for a second straight session on Monday as weaker-than-expected economic data fueled views the U.S. Federal Reserve might not trim its massive bond purchase program until later in the year.

U.S. orders for long-lasting manufactured goods fell 7.3 percent in July, more than the 4 percent fall forecast by economists polled by Reuters.

The data came after figures last week showed a sharp decline in July new-home sales, raising fears that the recent jump in interest rates is hurting the housing sector.

Ten-year Treasury note prices rose 3/32 on Monday to yield 2.807 percent, down from 2.82 percent late on Friday.

A category of orders often viewed as a proxy for business spending, non-defense capital goods orders excluding aircraft, fell 3.3 percent, after four straight months of gains.

"The durable goods orders number, combined with Friday's surprise 13.4 percent drop in July new-home sales, might indicate that the economy is uneven and that the Fed may not have a clear path to taper," said Kevin Giddis, senior managing director and head of fixed income capital markets at Raymond James.

But price gains were constrained by debt supply due later this week and expectations that the Fed will still curb bond buys this year, even if later than September.

The Fed is now buying $85 billion per month in Treasuries and mortgage-backed securities. However, policymakers, including Chairman Ben Bernanke, have hinted at an impending exit.

The timing of the Fed's slowdown in bond buys has become the dominant question for U.S. government debt markets.

RBS Securities traders said they were neutral on Treasuries, preferring to stay sidelined, given a "soup" of conflicting technical signals.

"Daily and weekly momentum studies remain oversold, but 10-year yields are still above a former bull trendline that had been in place for over six years and which comes in at about 2.70 percent this month," said William O'Donnell, head Treasury strategist at RBS Securities in Stamford, Connecticut. "This trendline is now a resistance for 10-year Treasuries."

Treasuries yields reached two-year highs recently after solid data suggested the world's biggest economy was ready for the Fed to back off its stimulus program, perhaps as soon as the bank's Sept. 17-18 meeting.

But yields have eased as fresh data paint a mixed picture.

Treasury auctions of $98 billion in new two-, five- and seven-year debt this week could keep yields from falling further.

Shorter and intermediate-dated notes have underperformed since the Fed released minutes of its July meeting on Wednesday.

"For the past few months, we have consistently argued that the belly of the U.S. yield curve was vulnerable to a sell-off," said Amrut Nashikkar, an analyst at Barclays in New York.

"We now expect 10-year yields to be at 3.1 percent by the end of this year and continue rising to 3.75 percent by the third quarter of 2014."

Previously, Barclays had forecast 10-year yields to rise to 2.9 percent by mid-2014.

"We are maintaining the view that rates will continue to move higher, but now believe that the drift will be faster than the market expects as we get closer to normalization of monetary policy," Nashikkar said.

Five-year note yields rose as high as 1.70 percent last Thursday, but fell back to 1.63 percent on Friday and 1.60 percent on Monday.

The August jobs data, due on Sept. 6, is the most influential economic indicator due before the Fed's September meeting.

The Fed on Monday bought $1.496 billion worth of Treasury coupon issues in the February 2036 to August 2043 sector of the curve.

Meanwhile, the Treasury's weekly auctions of three- and six-month bills were well bid. The Treasury will sell $25 billion in 14-day cash-management bills on Tuesday.

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