Treasuries fall on strong manufacturing news

Treasuries fell, with 10-year note yields rising for the first time in seven days, after a gauge of manufacturing was stronger than forecast and as a Federal Reserve official said the drop in oil prices will boost the economy.

The benchmark yields increased from an almost a six-week low after the Institute for Supply Management’s factory index was little changed at 58.7 last month, the second-strongest level since April 2011 and compared with the median forecast in a Bloomberg News survey of 58. Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley both said the steepest decline in oil prices in five years will stimulate consumer spending. Corporate bond sales also diverted demand from government securities.

“The market seemed to turn on a dime with the ISM report,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of 22 primary dealers that trade with the Fed. “Dudley emphasized today that the drop in oil is likely good for consumer spending.”

The 10-year yield rose seven basis points, or 0.07 percentage point, to 2.24 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data, after reaching the lowest level since Oct. 21. The price of the 2.25 percent note due in November 2024 fell 20/32, or $6.25 per $1,000 face amount, to 100 1/8.

Thirty-year bond yields added seven basis points to 2.96 percent.

Futures Positions

Hedge-fund managers and other large speculators reduced position that profit from a decline in 10-year bond futures, U.S. Commodity Futures Trading Commission data showed. Net-short positions totaled 75,327 as of Nov. 25, compared with 127,328 a week earlier.

Economists and strategists in a Bloomberg News survey estimate the U.S. 10-year yield will end the year at 2.5 percent, down from a forecast of 3.44 percent at the beginning of the year.

U.S. crude oil fell below $65 a barrel to the lowest level since July 2009 after the Organization of Petroleum Exporting Countries kept its production ceiling unchanged last week even as global demand fails to keep pace.

“I’m not very worried,” the Fed’s Fischer told an audience at the Council on Foreign Relations in New York. “The lower inflation that we’ll get from the lower price of oil is going to be temporary.”

Fed Policy

Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.” Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance.

“It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.”

The Institute for Supply Management’s factory index was the second-strongest level since April 2011, compared with 59 in October, the Tempe, Arizona-based group reported today. It exceeded the median forecast of 80 economists surveyed by Bloomberg.

Corporate Bonds

Corporate bond sales also weighed on Treasury prices, as companies including Berkshire Hathaway Energy Co., Cox Communications Inc. and Medtronic Inc. sold debt securities.

“We’re expecting decent issuance this week, and we have a small window before you get into the holidays,” said Matthew Duch, a money manager at Calvert Investments in Bethesda, Maryland, which oversees more than $13 billion in assets.

Treasuries returned 1 percent in November and 6 percent this year, according to the Bloomberg U.S. Treasury Bond Index. Treasuries lost 3.4 percent in 2013, the data show.

The Bank of America World Sovereign Bond Index has returned 7.8 percent this year, headed for its best annual performance since the global financial crisis of 2008 pushed the U.S. economy into a recession.

The average yield among securities in the Bank of America Merrill Lynch World Sovereign Bond Index dropped to 1.59 percent at the end of last week, the lowest level since May 2013. U.S. 10-year notes yielded 87 basis points more than the average of their G-7 peers. The premium reached 91 basis points on Nov. 27, the most since Sept. 17.

Yields fell to record lows from Germany to Italy, as Australia’s 10-year rate declined below 3 percent today for the first time in two years.

“You’ve got weak risk markets driven by the commodity complex weakening, so you’ll have lower global bond yields,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. Foreign buyers are “attracted by higher yields” in Treasuries.

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