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U.S. Yields Trade at Almost 2-Week High Before GDP, Jobs Data

July 29, 2013

July 29 (Bloomberg) -- Treasury 10-year note yields traded at almost the highest level in more than two weeks before reports forecast to show the U.S. economy grew in the second quarter and the unemployment rate dropped in July.

Treasury longer-maturity notes and bonds are heading for a third monthly decline before the Federal Reserve meets this week to discuss whether to taper its $85 billion a month debt- purchase program. Pending sales of previously owned U.S. homes declined in June while a report July 31 may show gross domestic product expanded at a 1 percent annualized rate last quarter.

"Moves will be exacerbated as we get closer toward GDP and the unemployment number," said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. "It’s a slow, quite, illiquid market."

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.58 percent as of 10:01 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due May 2023 was 92 27/32. The yield reached 2.63 percent on July 25, the most since July 10.

U.S government securities due in 10 years and more dropped 1.5 percent in July, according to the Bloomberg U.S. Treasury Bond Index, amid speculation the central bank is moving toward reducing debt purchases. Treasuries have lost investors 2.6 percent this year, according to Bank of America Merrill Lynch indexes.

 

Yield Forecast

 

Ten-year yields will climb to 2.64 percent by year-end, according to a Bloomberg survey with the most recent projections given the heaviest weightings.

The Treasury is scheduled to announce its quarterly funding needs on July 31, and a survey of the 21 primary dealers shows government sales will be cut by $40 billion to $100 billion during the next year.

About two-thirds of those responding, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., see reductions this year, possibly as soon as next month. The U.S. issued $2.153 trillion in 2012.

The Fed, which has been buying $45 billion of Treasuries and $40 billion of mortgage bonds each month to put downward pressure on borrowing costs, will start trimming purchases in September, according to economists.

 

Fed Policy

 

The central bank will meet on July 30-31 after keeping its target for overnight lending in a range of zero to 0.25 percent since December 2008. Policy makers said in a June 19 statement that leaving the federal funds rate in that range "will be appropriate at least as long" as unemployment remains above 6.5 percent and the forecast for inflation in one-to-two years doesn’t exceed 2.5 percent.

"Data this week may be mixed, but I don’t think it will put the skids under the U.S. economic recovery," said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

The index of pending home sales dropped 0.4 percent, less than forecast, to 110.9 in June after climbing a month earlier to the highest level since December 2006, figures from the National Association of Realtors showed today in Washington. The median forecast in a Bloomberg survey of 40 economists called for a 1 percent decline.

A report Aug. 2 may show the unemployment rate dropped to 7.5 percent, from 7.6 percent and the U.S. added 185,000 jobs in July, compared with 195,000 the previous month.

Treasury trading volume was $196.1 billion on July 26 at ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume has averaged $278 billion a day this month, versus $446 billion a day in June.

Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 81.64 on July 26. The gauge has fallen from 117.89 on July 5, which was the highest level since December 2010.

 

--Editors: Paul Cox, Dave Liedtka

 

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.com

 

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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