July 18, 2013 / 7:42 PM / 5 years ago

TREASURIES-U.S. bond prices fall on upbeat factory, claims data

* No groundbreaking policy news from Bernanke testimony
    * Weekly U.S. jobless claims fall to lowest since May
    * U.S. 10-year TIPS has positive yield for first time since
    * U.S. to sell $99 billion coupon-bearing supply next week

    By Karen Brettell and Richard Leong
    NEW YORK, July 18 (Reuters) - U.S. Treasuries prices fell on
Thursday as encouraging data on jobless claims and factory
activity supported the view the economy may be strong enough for
the Federal Reserve to pare back bond purchases.
    Fed Chairman Ben Bernanke's second day of testimony before
U.S. lawmakers about monetary policy produced no groundbreaking
insights on when it might reduce $85 billion monthly bond-buying
stimulus and subsequently increase short-term interest rates. 
    Ten-year yields fell to their lowest level in two weeks
after Bernanke told a House of Representatives panel on
Wednesday that the Fed's plans to scale back purchases of
Treasuries and mortgage-backed securities later this year are
not set in stone and still depend on the strength of the
economy. He stuck to basically the same message before the
Senate Banking Committee on Thursday. 
    "He stayed on message both days. The market was little moved
today on Bernanke and more on the data," said David Lafferty,
chief investment strategist at Natixis Global Asset Management
in Boston, which oversees about $785 billion. 
    The Philadelphia Federal Reserve Bank's index on business
activity in the Mid-Atlantic region rose to 19.8, its highest
level in more than two years, topped economists' forecast of
    "This is an encouraging sign heading into the second half of
the year. Looking at June and July, we are seeing an improvement
in the manufacturing sector," said Ryan Sweet, a senior
economist at Moody's Analytics at West Chester, Pennsylvania.
    Earlier, the government reported weekly total initial
filings for jobless benefits unexpectedly fell to 334,000 last
week, the lowest since early May.
    Improved readings on manufacturing and jobs, together with
Bernanke's perceived dovish remarks, propelled the Dow and
Standard & Poor's 500 stock indexes to record highs, adding to
selling in Treasuries, analysts said. 
    In late New York trading, benchmark 10-year notes
 last traded 12/32 lower in price to yield 2.536
percent, up 4.5 basis points from late on Wednesday.
    The 30-year bond fell 29/32 in price with a
yield of 3.633 percent, up 5.6 basis points from Wednesday.
    The Treasuries market has stabilized after a dramatic
selloff that sent 10-year note yields to two-year highs of 2.76
percent on July 8. They jumped by more than a full percentage
point from around 1.60 at the beginning of May.
    In an bid to calm investors and reduce market volatility, a
number of top Fed officials stressed in speeches after the
selloff that the Fed will pull back its purchases slowly and
will keep rates anchored near zero for a long time.
    In addition to historic high unemployment, Bernanke and
other policymakers have raised the risk of deflation, a downward
price spiral that crippled Japan for a decade, as a factor that
would keep Fed to maintain a loose policy stance.
    With Bernanke's congressional testimony over, traders will
likely turn their focus to the stock market, next week's $99
billion in coupon-bearing supply and economic data.
    "There's a bit of Fed burnout. The market has assimilated
much of the Fed's view," Natixis' Lafferty said.
    Demand for inflation-linked bonds emerged on Thursday when
the U.S. Treasury Department sold $15 billion in 10-year
Treasury Inflation-Protected Securities (TIPS).
    The latest 10-year TIPS supply fetched positive yield for
the first time in nearly two years. 
    TIPS have stabilized after being one of the worst performers
in the recent selloff. Investors had paid a premium to buy TIPS
on the expectation that Fed bond purchases would spur higher
inflation, but that has not yet happened and inflation is
instead running well below the Fed's 2 percent target.
    Consumer price data on Tuesday showed that prices were
stabilizing. The Consumer Price Index (CPI) increased 0.5
percent in June, the largest increase since February, after
nudging up 0.1 percent in May, though gasoline prices accounted
for about two-thirds of June's rise.
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