Treasuries dropped for a second day as a report showed the economy expanded last quarter faster than previously forecast, trimming demand for the safest securities.
Benchmark 10-year yields rose as the economy grew at a 2.5% annual pace in the second quarter, more than forecast and up from the previous estimate of 1.7%, while weekly jobless claims fell more than projected. The reports boosted speculation the Federal Reserve will reduce the pace of bond purchases as soon as next month. The U.S. plans to auction $29 billion of seven-year debt after a sale of five-year notes yesterday drew the least demand in four years.
“It’s putting a little bit of pressure on Treasuries going into the seven-year auction,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Tapering is almost a done deal unless you get a real bad employment number in September. What they will argue over is the size.”
The U.S. 10-year yield increased five basis points, or 0.05 percentage point, to 2.82% at 8:55 a.m. New York time after adding six basis points yesterday, according to Bloomberg Bond Trader prices. The yield climbed to 2.93% on Aug. 22, the most since July 2011. The 2.5% note due in August 2023 fell 14/32, or $4.38 per $1,000 face amount, to 97 1/4.
Treasuries lost 3.3% this year through yesterday, including 0.8% in August, according to Bloomberg U.S. Treasury Bond Index.
The seven-year notes being sold today yielded 2.27% in pre-auction trading, compared with 2.026% at the previous auction on July 25. Investors bid for 2.54 times the amount offered last month compared with 2.61 at the June sale.
Indirect bidders, the category of investors that includes foreign central banks, purchased 48.6% of the securities last month, primary dealers bought 34.9% and direct bidders purchased 16.6%.
The five-year notes sold yesterday had a bid-to-cover ratio of 2.38, the lowest since July 009 and compared with an average of 2.74 for the past 10 sales. They drew a yield of 1.624%, compared with a forecast of 1.618% in a Bloomberg survey of eight of the Fed’s 21 primary dealers.
The Fed is scheduled to purchase as much as $1.75 billion of securities maturing from February 2036 to August 2043 today, according to the New York Fed’s website. Debate about when policy makers will start to taper the $85 billion in monthly bond buying has roiled financial markets around the world in the past three months and sparked a selloff in fixed-income assets.
Treasuries rose earlier this week on speculation the U.S., France and Britain were moving closer to military action against Syria after the nation’s government allegedly used chemical weapons against civilians.
“Before acting, we need proof” of chemical weapon use, Najat Vallaud-Belkacem, a French cabinet member and spokeswoman for the government, said on I-tele. A probe into the chemical attack by United Nations inspectors will be ready in “two or three days,” she said. “It’s important to be anchored in international law.”
U.S. President Barack Obama and U.K. Prime Minister David Cameron face a decision whether to attack Syria without a UN mandate amid Russian resistance, demands for consultation from lawmakers at home and domestic opposition to involvement in another conflict in the Middle East.
“We’ve seen a small reversal in sentiment as markets begin pricing in a delay to a potential Syria air strike,” Deutsche Bank AG analysts including Jim Reid in London wrote in a note to clients. “The strike is running into potential delays with UN inspectors saying they need several more days to carry out their investigations in Syria and to undertake scientific analysis before reporting back.”
The economy expanded at a faster pace in the second quarter as a smaller trade deficit and gains in inventories overshadowed the effects of federal budget cutbacks. GDP growth topped the median forecast of 79 economists surveyed by Bloomberg projected a 2.2% gain.
Jobless claims in the week ended Aug. 24 dropped 6,000 to 331,000 from a revised 337,000 the week before that was higher than initially reported, the Labor Department said. The median forecast of 50 economists surveyed by Bloomberg called for a drop to 332,000.