Q1 GDP an aberration?

Treasuries fell, extending the first monthly drop since March, on speculation U.S. economic growth is robust enough for the Federal Reserve to raise interest rates next year.

Yields on benchmark 10-year notes (CBOT:ZNU14) climbed from a three-week low reached June 27 as BlackRock Inc., the world’s biggest money manager, forecast the first increase in borrowing costs for the second quarter of 2015. While U.S. notes and bonds held a gain from the first half of this year, analysts are sticking to estimates for declines as the world’s biggest economy gathers pace after a first-quarter slowdown. A report this week may show employers added more than 200,000 jobs for a fifth month.

“It’s all about the data this week,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of the 22 primary dealers that trade Treasuries with the Fed. “The market is looking for some confirmation that first-quarter gross domestic product was an aberration and that second-quarter GDP is a real bounce-back.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.55% at 9:20 a.m. New York time, according to Bloomberg Bond Trader data. The figure compares with the average of 3.41% for the past decade. The 2.5% note maturing in May 2024 fell 6/32, or $1.88 per $1,000 face amount, to 99 17/32.

Rate Odds

The Bloomberg U.S. Treasury Bond Index declined 0.1% in June. It gained 3.3% for the first half of 2014, reflecting a contraction in the economy from January through March.

Traders see about a 53% chance the central bank will raise its benchmark rate to at least 0.5% by July next year, up from 43.2% odds at the end of May, Fed Funds futures show.

The Fed rate will probably be increased in the second quarter of next year, Stephen Cohen, BlackRock chief investment strategist for international fixed income, said in London today. The company’s view is not far from consensus and there would need to be a big improvement in U.S. economic data to change the market’s view, Cohen said.

The Treasury yield curve will steepen as data improves and consumer prices rise, he said at a media briefing. The yield curve is a chart showing rates on bonds of different maturities.

Yield Curve

The gap between yields on U.S. two-year notes (CBOT:ZTU14) and 30-year bonds, was at 2.91 percentage points. It touched 2.86 percentage points on June 26, the least since May 2013.

“One may argue that the economic picture is still mixed and rates may stay low for longer, but the risk of Treasury yields rising is greater than them falling,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s corporate and investment banking unit in London.

The Institute for Supply Management’s manufacturing index will show a pickup at U.S. factories in June, according to a survey before the report today.

U.S. gross domestic product shrank at a 2.9% annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25.

In China, the purchasing managers index measuring manufacturing increased to 51 in June, the highest level since December, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing. A private manufacturing index from HSBC Holdings Plc and Markit Economics also climbed to the most this year.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.25 percentage points. The figure has risen from this year’s low of 2.10 in February and compares with the average for the past decade of 2.20.

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