Treasuries fall second day as economy expands more than forecast

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.

Auction Update

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.

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