BOND REPORT: Treasury Yields End Higher After Housing Data

By Sunny Oh Features Dow Jones Newswires

10-year Treasury yield lingers below 2.40%

Continue Reading Below

Treasury yields remained higher Monday after an improvement in home builder sentiment offset a weak reading on a New York state manufacturing gauge.

The yield for the 2-year note rebounded by 0.6 basis point to 1.299%. Bond prices move in the opposite direction of yields; one basis point is equal to one hundredth of a percentage point.

The yield on the 10-year Treasury note advanced 0.7 basis point to 2.338%, while the yield on the 30-year Treasury bond, or the long bond, gained 1.5 basis points to 3.006%.

The Empire State Manufacturing Index, which is based on a monthly survey of health of manufacturers in New York state, fell to -1 in May from 5.2 in April, its first negative reading since October. Yields pared back from early gains in response to the survey.

But yields resumed their advance as the National Association for Home Builder's Housing Market Index gained 2 points to hit 70 (http://www.marketwatch.com/story/slow-and-steady-growth-wins-the-race-for-home-building-and-the-economy-2017-05-14), its second-highest level since the 2008 financial crisis. Any reading above 50 indicates growth. Strong economic numbers can heighten inflation expectations, which can erode the value of bond's fixed payments.

Continue Reading Below

"The index remains at an elevated outright level and continues to suggest that optimism among home builders is high," said Thomas Simons, senior money market economist for Jefferies, in a note.

After April's consumer-price index data came in lower than expected on Friday (http://www.marketwatch.com/story/us-consumer-prices-rebound-in-april-2017-05-12), economists showed some concerns over the prospect of a second quarter rebound in economic growth. Historically, economic indicators are soft in the first three months of the year due to a range of reasons like cold weather, before gaining strength again in the following three months.

"It was the weakness in the April CPI (relative to the consensus) that probably unnerved traders most last week. While most traders believe that hard data in the second quarter will be OK, the missing link around the world is the accompanying inflation pressure," said Thierry Wizman, global interest rates and currencies strategist for the Macquarie Group, in a note.

Weak economic data has kept yields for 10-year notes at the bottom end of the trading range of 2.30% to 2.60%, which has confined yields since Donald Trump entered the White House. The bearish view has endured even against the backdrop of the Fed on a tightening cycle, subsiding geopolitical jitters and an economy close to full employment (http://www.marketwatch.com/story/no-one-is-noticing-this-big-red-flag-for-the-stock-market-2017-04-12).

Even as most analysts expect rates to rise, hedge funds and speculators are betting on the opposite outcome, according to futures data. The Commodity Futures Trading Commission reported hedge funds and speculators were wagering on 10-year Treasury prices to head higher. The net speculative "long" exposure for 10-year Treasurys jumped to 229,119 contracts in the week ending May 12, its highest level since early 2008.

The surge in bullish sentiment for U.S. government paper comes after the CFTC showed "short" exposure, a measure of bearish bets, notched an all-time high on the week ending Feb 28.

(END) Dow Jones Newswires

May 15, 2017 16:30 ET (20:30 GMT)