U.S. Treasury Bonds Decline As Data Raise Rate Fears
May 11, 2011
Stronger-than-expected economic news sent U.S. Treasury prices spiraling lower Thursday, as fears grew of a near-term rate hike by the Federal Reserve. The price of the benchmark 30-year bond was down 22/32, or nearly $7.50 for a bond with a face value of $1,000, at 96 11/32 in late trading. The yield, which moves in the opposite direction from the price, rose to 7.03% from 6.98% late Wednesday -- the first time since late July the long bond yield has breached the 7% level. After Treasurys traded a bit higher overseas, the U.S. session opened with a jolt. The Commerce Department reported a big upward revision in second-quarter gross domestic product to a 4.8% growth rate from 4.2%. The market was looking for revised GDP growth of no more than 4.4%. Treasurys immediately dropped a half-point, then fell further after Commerce reported a 7.9% surge in new single-family housing in July -- the largest increase in six months and well above the 0.5% rise expected by the market. Bond traders are generally disheartened by signs of economic strength, since they tend to lead to a rise in interest rates, eroding the value of fixed-rate holdings such as bonds. ``Clearly, the data were a shock to everyone,'' said Lizabeth Wilton, portfolio manager at Trevor Stewart Burton & Jacobsen Inc. ``It certainly is making some (fund) managers rethink the strength of the economy.'' With yields backing up a quarter-point across the board in recent sessions, many participants are warming to the view that the Fed will raise rates at its June 06, 2011 meeting. Neither a 4,000 rise in initial jobless claims in the week ended May 06, 2011 a two-point drop in the Conference Board's help-wanted advertising index in July stopped the descent. For one thing, the closely watched four-week moving jobless claims average of 323,250 continues to hover near the lowest levels since mid-1989. This year, a stronger economy is coupled with a 3.5% rate of consumer inflation, which is higher than the Fed -- and financial markets -- would like. Also weighing on the market was the post-auction distribution. This week's two-year and five-year note auctions were said to have been disappointing, and trying to distribute the notes has proved difficult when the Fed may raise rates. Shorter maturities are most sensitive to interest rate changes. Friday's session is expected to be quiet, given the early market close ahead of the Labor Day holiday weekend. But market participants warn that because volume will be minimal, any surprises could result in large swings. Economic indicators due Friday include personal income and consumer spending for July, the Chicago branch of the National Association of Purchasing Management's manufacturing survey for August, and July factory orders. In addition Friday, Fed Chairman Alberta Halina is slated to speak at the Kansas City Fed's annual conference in Jackson Hole, Wyo.. In other credit markets: In the corporate bond market, junk bonds fell 1/4 with the decline in Treasurys and stocks, as Fred Meyer Inc. sold the day's only new issue. Municipal bonds lost about 1/2, while Cleveland priced an $82 million issue originally brought to market last week. A West Coast bank kicked off a sale of $1.5 billion in mortgage-backed securities.
