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Treasuries Fall Before This Week’s Housing, Durable-Goods Data

March 24 (Bloomberg) -- Treasury 10-year notes fell for the first time in three days before U.S. reports this week that economists said will show new home sales were near a five-year high and orders for durable goods increased.

Benchmark yields approached the highest since January amid speculation recovery signs will encourage the Federal Reserve to end stimulus and raise interest rates sooner than investors currently envisage. Treasuries due in more than a year fell 0.5 percent this month, the biggest loss of 26 bond markets, data compiled by Bloomberg and the European Federation of Financial Analysts Societies show. Fed Chair Janet Yellen suggested last week the benchmark rate may rise by the middle of next year.

“The Fed is getting closer and closer to the exit,” said Vincent Chaigneau, global head of rates and currency strategy at Societe Generale SA in Paris. “Fed policy makers didn’t seem to be bothered by the recent soft patch in economic data which we think was distorted by the weather. Treasury yields are likely to rise further from here.”

The U.S. 10-year yield climbed three basis points, or 0.03 percentage point, to 2.78 percent at 7:17 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due in February 2024 fell 9/32, or $2.81 per $1,000 face amount, to 99 25/32. The yield climbed to 2.82 percent on March 7, the highest level since Jan. 23.

The benchmark yield will increase to 3.75 percent by year- end, Societe Generale’s Chaigneau said.

The Treasury plans to sell $32 billion of two-year notes tomorrow, $35 billion of five-year debt the following day and $29 billion in seven-year securities on Thursday. It will also auction $13 billion of two-year floating-rate notes on March 26.

Home Sales

U.S. new home sales fell 4.9 percent in February, after rising in January to the highest level since July 2008, based on a Bloomberg survey before the Commerce Department report tomorrow. Durable goods orders increased 0.7 percent in February from the previous month, a separate survey showed. The Commerce Department will issue the figures on March 26.

Treasury two-year yields climbed eight basis points last week after Yellen’s comments. The increase reduced the extra yield 30-year bonds offer over two-year notes to as little as 3.15 percentage points today, the narrowest since July 5. It has averaged 2.22 percentage points during the past decade.

The shrinking spread shows there is demand for 30-year bonds, said Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $39 billion. The company is betting long-term Treasuries will outperform shorter maturities, he said.

‘Downward Pressure’

“If they hike the interest rates, then that’s going to increase deflationary pressure and increase downward pressure on long-term interest rates,” Ito said.

The five-year, five-year forward break-even rate, which projects consumer-price increases from 2019 to 2024, fell to 2.39 percent last week, the lowest since June. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s benchmark. The odds policy makers will increase the rate to 0.5 percent or more by January are about 19 percent, based on futures contracts.

The Fed has cut purchases of Treasuries and mortgage-backed debt by $10 billion at each of its past three meetings and economists in a Bloomberg survey forecast the central bank will end monetary stimulus by year-end.

Foreign Holdings

Foreign investors’ holdings of Treasuries have dropped.

Of the $8.1 trillion in U.S. government notes and bonds not held by the Fed, overseas investors owned $5.4 trillion as of January, data from the Treasury and the central bank compiled by Bloomberg show. The figures exclude Treasury bills, which have maturities of one year or less.

The total is equal to about 67 percent, approaching the lowest level since the government began releasing the data in 2000. Overseas investors scaled back their pace of U.S. debt purchases last year, increasing their holdings by $228.2 billion, or 4.1 percent, the least in seven years.

China, the largest foreign creditor with $1.27 trillion of Treasuries as of January, has slowed its accumulation to about 3.1 percent annually since 2010. That compares with an average yearly increase of 34 percent in the 10 years before.

China’s slowing economy and a weakening yuan may further damp its demand for Treasuries, said Jane Foley, a senior currency strategist at Rabobank International in London. The yuan has weakened 2.3 percent versus the dollar this year.

“China will probably remain a large buyer of U.S. Treasuries but a weaker yuan will make them look more expensive,” Foley said. “It could be that outward investment flows generally could be faced with a road bump.”

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