Good news foreshadows earlier Fed trigger

December 23, 2014 03:21 AM

Treasuries fell as a report showed U.S. economic growth exceeded forecasts in the third quarter, reducing demand for government debt as the Federal Reserve prepares to raise interest rates next year.

The benchmark 10-year note yield (CBOT:ZNH15) increased as a report showed the world’s largest economy expanded at an annualized rate of 5%, the fastest rate in a decade and compared with a forecast of 4.3% in a Bloomberg News survey. Durable goods orders unexpectedly dropped 0.7% in November, compared with an estimate of a 3% increase. The U.S. is scheduled to sell $35 billion of five-year notes today, along with $13 billion of two-year floating-rate notes.

“It helps the Fed for their lift-off to start in the next six months,” Said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “The data was mixed. People are looking at durable goods. It missed significantly to the downside. GDP was strong. Personal consumption was excellent. Yields are heading a little bit higher on this.”

The U.S. 10-year yield rose three basis points, or 0.03 percentage point to 2.19% at 8:41 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25% note due in November 2024 was 100 18/32.

Two-year note yields rose one basis point to 0.73%, reaching the highest level since April 2011.

Bond Trading

Treasuries started trading in London time after being closed in Japan today for a national holiday. The Treasury market will close Dec. 25 in observance of the Christmas holiday, according to the Securities Industry and Financial Markets Association’s website. The group recommends an early close on Dec. 24.

Treasuries have returned 6.1% this year through the end of last week, according to the Bloomberg U.S. Treasury Bond Index, set for the biggest annual gain since 2011. They lost 3.4% last year.

Gross domestic product growth was up from a previously estimated 3.9%, revised figures from the Commerce Department showed. Consumer spending is poised to charge into 2015 as more employment and lower gasoline prices boost household confidence and buying power.

Improving data from the U.S. is fueling a debate on the timing of interest rate increases. The Federal Open Market Committee said last week it will be “patient” in its approach, replacing a pledge to keep borrowing costs low for a “considerable time.”

Fed Watch

“There are still doubters who think the Fed will remain on hold through 2015 but after last week’s FOMC meeting they’re going to need some softer data to support their view,” Kit Juckes, a London-based global strategist at Societe Generale SA, wrote a note published yesterday. The Fed “is on track to raise rates in 2015,” he wrote.

The U.S. 10-year break-even rate, a gauge of expectations of consumer prices derived from the difference in yield between conventional Treasuries and inflation-protected securities, was little changed at 171 basis points after shrinking to 158 basis points on Dec. 16, the narrowest since September 2010.

The five-year notes due to be sold today yielded 1.705% in pre-auction trading. That would be the highest level at the monthly sales since September.

The U.S. sold $27 billion of two-year notes yesterday at an average yield of 0.703%, the most since March 2011. In addition to today’s sales, the Treasury is also due to sell $29 billion of seven-year debt on Dec. 24.

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