Economy gaining traction?

Treasuries dropped from almost a five-week high before Federal Reserve Chair Janet Yellen testifies to lawmakers in Washington tomorrow as investors seek clarity on the central-bank’s plans to scale back monetary stimulus and raise interest rates next year.

Benchmark 10-year (CBOT:ZNU14) yields rose for the first time in six days before reports forecast to show gains in retail sales and industrial production, adding to signs the economy is gaining traction. U.S. debt fell amid speculation Portugal will be able to contain financial woes among its banks.

Given “stable and improving growth anecdotes, people are expecting Yellen to be more optimistic than she’s been in the past,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The benchmark 10-year yield added two basis points, or 0.02 percentage point, to 2.53% at 8:47 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.5% note due in May 2024 was at 99 22/32. The yield touched 2.49% on July 10, the lowest since June 2.

The Bloomberg U.S. Treasury Bond Index has gained 3.3% this year, dropping 3.4% last year. The Bloomberg Global Developed Sovereign Bond Index has returned 5% this year, compared with 7.6% for the Standard & Poor’s 500 Index  of stocks.
 

Economic Reading
 

U.S. retail sales rose 0.6% in June from the prior month, after gaining 0.3% in May, based on a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. Industrial production advanced 0.3%, following a 0.6% increase, a separate survey shows. The Fed is scheduled to issue the report July 16.

“I’m a seller of Treasuries to start the week,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “I’m a little bit surprised they are not under more pressure. I would look for yields to go back up.”

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.26 percentage points. The average for the past decade is 2.20.
 

Fund Investors
 

Individual investors have put about $100 billion into equity mutual funds and exchange-traded funds during the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.

“Stocks will be much better than bonds,” said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “The U.S. economy continues to recover. There is some inflation pressure in the U.S.”

Yellen will deliver semi-annual monetary policy testimony to the Senate Banking Committee tomorrow and to the House Committee on Financial Services the next day.

Investors see about a 67% chance the central bank will increase its key rate by September 2015, futures contracts show. The central bank has kept its target for the benchmark, the rate banks charge each other on overnight loans, in a range of zero to 0.25% since December 2008.
 

Portugal Watch
 

Treasuries rose last week, with the 10-year yield dropping the most since March, as Banco Espirito Santo SA roiled markets after parent company Espirito Santo International SA missed some payments on commercial paper. The bank appointed Vitor Bento to be chief executive officer at a meeting yesterday after the Portuguese central bank urged the country’s second-biggest lender by market value to make changes to its executive management earlier than previously planned.

Portugal’s 10-year bond yield dropped nine basis points to 3.79% after rising 28 basis points in the five days through July 11.

The intensifying debate about when the Fed raises interest rates is little more than a sideshow when it comes to the ability of the U.S. to borrow.

For all the concern fixed-income assets will tumble once the central bank boosts rates, the Treasury Department still managed to get investors to submit $3.4 trillion of bids for the $1.12 trillion of notes and bonds sold this year, according to data compiled by Bloomberg. That represents a bid-to-cover ratio of 3.06, the second-highest on record and up from 2.88 in all of last year.

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