US Treasury notes posted their biggest two-day decline since October 1998 on speculation an economic rebound will bring an end to a series of interest-rate cuts by the Federal Reserve next week.
Notes fell after reports showed retail sales beat forecasts in April, and that consumer confidence rebounded in May from its worst level in 5 1/2 years. Losses in bonds reflected concern that four rate reductions this year will boost growth and inflation, analysts said.
The indications that the economy may improve means "that the Fed is 80 percent done with rate cuts rather than 60 percent, and that brings on selling," said David Schroeder, who sold Treasuries over the past month for the US$6 billion he oversees at American Century Investments in Mountain View, California. He expects the economy to rebound after this quarter.
The benchmark 10-year Treasury note fell 1 5/32 point, or US$11.56 per US$1,000 face amount, to a price of 96 5/8. Its yield increased 16 basis points to 5.45 percent, the highest since Dec. 4, and on top of a 12 basis point drop yesterday. The most active two-year note, among securities most sensitive to changes in Fed rates, sank 9/32 to a price of 99 13/32, and its yield climbed 16 basis points to 4.32 percent.
Ten-year yields have climbed 0.69 percentage point since March 22 as rising stocks fed the notion that consumer spending wouldn't drop to the point where recession follows. "It's a massacre," Stephen Gallagher, chief US economist at SG Cowen, told Bloomberg radio of the two-day rout that capped the fourth losing week in five.
Sales this week of US$22 billion in five and 10-year government debt, and more than US$40 billion non-Treasury issues, exacerbated price declines, traders said.
Treasuries slipped as the government said retail sales rose 0.8 percent last month, above expectations for a 0.1 percent rise by economists in a Bloomberg News survey. That followed the 0.4 percent revised decrease in sales for March, compared with the 0.2 percent fall first reported.
Selling compounded after the University of Michigan's preliminary consumer confidence index for May rose to 92.6, from the final reading of 88.4 in April. Economists polled by Bloomberg News expected a drop to 88.
"The fear of recession should diminish" and bonds that are priced for a weaker economy are now "overvalued," said Sung Won Sohn, chief economist at Wells Fargo & Co in Minneapolis. A half-point rate reduction next week "will be defensive in nature, to make sure confidence doesn't fall apart." Fed funds futures, the futures market's closest match to expectations on Fed rates, show traders see smaller chances for a rate reduction after May. The implied yield on the July contract rose 9 basis points to 3.97 percent. Futures contracts also indicate traders are giving some probability for just a quarter-point move next week, analysts said.
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