Treasuries fall with U.S. stocks while New Zealand kiwi weakens

Treasuries fell as stronger growth in American service industries dimmed prospects for Federal Reserve bond buying, while U.S. benchmark stock indexes retreated from records. The New Zealand dollar slid as a milk-powder exporter said some shipments may be tainted.

Ten-year Treasury yields rose four basis points to 2.64% as of 4 p.m. in New York. The Standard & Poor’s 500 Index slipped 0.2% while the Stoxx Europe 600 Index closed 0.2% higher after climbing as much as 0.6%. The yen strengthened 0.7% to 98.30 per dollar while New Zealand’s dollar weakened against 15 of its 16 main peers. Wheat, sugar and gasoline lost more than 1.3% to lead the S&P GSCI Index of commodities lower.

The Institute for Supply Management’s non-manufacturing index increased to 56 in July, higher than the median economist estimate of 53.1 and the prior month’s 52.2. Euro-area services output shrank at a slower pace than initially estimated in July, London-based Markit Economics said today. An index of China’s non-manufacturing sectors in July increased for the first time since March. Stocks extended losses as Federal Reserve Bank of Dallas President Richard Fisher said the central bank is closer to slowing its bond purchases.

“The consensus still remains that tapering is on track to be announced in September,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That reflects the recent series of strong economic data. The Treasury market is backing up as we get set to take down this week’s refunding auctions.”

The U.S. is scheduled to sell $72 billion of three-, 10-and 30-year securities this week.

Yield Gaps

Thirty-year Treasury bond yields increased five basis points to 3.74% and two-year rates were up less than one basis point at 0.30%. Two years after S&P stripped the U.S. of its top rating, America’s credit quality is getting a boost from economic growth outpacing that of the 12 nations graded AAA.

The gap between Treasury five- and 10-year note yields is wider than that for the higher-rated sovereigns, showing fixed- income investors anticipate the U.S. will grow faster than its peers, according to data compiled by Bloomberg. Other measures also show the U.S. improving, as the cost to insure against default is the lowest since 2009, the dollar has risen the most since 2008 and stocks are trading near all-time highs.

The Fed’s Fisher, one of the most vocal critics of quantitative easing, warned investors not to rely on the central bank’s $85 billion in monthly bond purchases.

Fed ‘Put’

“Financial markets may have become too accustomed to what some have depicted as a Fed ‘put,’” or the idea that the central bank will loosen credit after a market decline, Fisher said in a speech in Portland, Oregon. “Some have come to expect the Fed to keep the markets levitating indefinitely. This distorts the pricing of financial assets” and can lead to “serious misallocation of capital.”

The S&P 500 closed at a record of 1,709.67 on Aug. 2, pushing its valuation to a three-year high. The benchmark index traded at 15.5 times estimated earnings, compared with an average of 13.9 over the last five years, data compiled by Bloomberg showed.

Per-share adjusted earnings have increased 2.9% for the 392 companies in the S&P 500 that posted results so far in the reporting season, with 74% beating the average analyst estimate. Analysts project companies on the gauge will increase their third-quarter earnings per share by 3.3% from a year earlier, and their profit in the fourth quarter by 9.9%, according to estimates compiled by Bloomberg.

The S&P 500 is up 20% in 2013 and has rallied about 152% from its bear-market low in 2009.

‘Powerful Move’

“The market has put on such a powerful move this year that regardless of the numbers that come out we’re due for some type of pullback, even if it’s brief in duration and mild in severity,” Matthew Kaufler, a portfolio manager at Federated Investors Inc. in Rochester, New York, said by phone. His firm oversees $363.8 billion.

Gauges of utility, energy and industrial companies lost at least 0.3% to lead losses in eight of the 10 main industry groups in the S&P 500 today, while technology and consumer-staples companies advanced. Intel Corp., United Technologies Corp. and Travelers Cos. fell at least 1% for the biggest declines in the Dow Jones Industrial Average.

Qualcomm Inc. dropped 0.8% as Piper Jaffray Cos. cut its rating on the company. Berkshire Hathaway Inc. climbed 0.4% after posting second-quarter earnings that exceeded analysts’ projections. Tyson Foods Inc. rose 4.1% after reporting third-quarter results that beat estimates.

Forecast Raised

Barry Knapp, head of U.S. equity strategy at Barclays Plc, raised his year-end forecast for the S&P 500 to 1,600 from 1,525. The raised projection matches the second-lowest among 17 strategists tracked by Bloomberg and implies a 6.4% retreat from last week’s closing level. Knapp said he expects a reduction in Fed asset purchases in September and the benchmark gauge to plunge below his target before stabilizing, while acknowledging that improving economic data required a higher year-end forecast.

“It appears that our bull case -- faster-than-expected improvement in capital investment and better-than-expected consumer resiliency to tax hikes -- may be playing out,” he wrote in a note to clients dated Aug. 2. “We expect a correction below our new target, followed by stabilization and a broad range that extends into early 2014 as fundamentals catch up with share prices.”

The Stoxx Europe 600 Index added 0.2% for a sixth straight advance, its longest rally since December. Fifteen of the 19 industry groups in the European index advanced, while trading volumes were 28% less than the 30-day average.

European Movers

HSBC Holdings Plc, Europe’s largest bank, slid 4.4% after earnings trailed projections and Chief Executive Officer Stuart Gulliver said the lender’s fast-growing emerging markets are slowing.

Lloyds Banking Group Plc rose 2.7% as the Financial Times reported that the lender plans to pay as much as 70% of profit as dividends by 2015. PostNL NV, the biggest Dutch postal operator, declined 11%, the most since January, after second-quarter sales missed analysts’ estimates.

The MSCI Emerging Markets Index advanced for a third day, climbing 0.1%. The Shanghai Composite jumped 1%. A measure of China’s non-manufacturing sector gained to 54.1 in July from 53.9 in June, government data showed Aug. 3. A services index from HSBC and Markit Economics was unchanged at 51.3, a separate report showed today.

New Zealand’s dollar, known as the kiwi, fell 0.4% to 78.06 U.S. cents, after touching 76.93, the lowest since July 8. China and Russia halted imports of some milk powder from New Zealand’s Fonterra Cooperative Group Ltd. after the largest dairy exporter warned of a contaminated ingredient. Fonterra said on Aug. 3 that three batches of the product made last year may contain the bacteria.

Australia Economy

Australia’s 10-year bond yield declined 19 basis points, or 0.19 percentage point, to 3.61%. Retail sales growth unexpectedly stalled in June, data showed before a central bank meeting. The Reserve Bank of Australia will probably cut the benchmark interest rate to 2.5% tomorrow, according to the median of 27 estimates in a Bloomberg survey of economists.

Oil fell for a second day on speculation that Libyan production will increase, losing 0.4% to $106.56 a barrel in New York, and Brent crude slipped 25 cents to $108.70. Libya reopened a terminal closed by protests and Iranian President Hassan Rohani pledged in his inaugural speech to take a moderate approach.

U.S. natural gas futures were down 0.8% at $3.319 per million British thermal units, the lowest since Feb. 22, amid forecasts for below-average temperatures this month. Coal for 2014 delivery dropped for a seventh day to an all-time low, sliding 0.8% to $82.50 a metric ton, broker data compiled by Bloomberg show.

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