Brian Edmonds Comments: Treasury Prices Fall On Data, Supply; 10-Yr Yield Now Above 3%

July 8, 2010, The Wall Street Journal

Prices of Treasury securities fell Thursday morning, pushing the benchmark 10-year note's yield above 3% for the first time since June 29, as worries over the global economic outlook eased, reducing demand for safe assets.

Sentiment on the growth prospects improved following a strong jobs report from Australia and better-than-forecast U.S. jobless claims data. Easing concern over the euro-zone's debt problems and optimism on corporate earnings also spurred investors to move out of Treasurys to buy riskier assets such as U.S. stocks.

Supply pressure also mounted on the bond market. The Treasury Department at 11 a.m. EDT is scheduled to announce the sizes of next week's new debt sales in three-year, 10-year and 30-year maturities. At 1 p.m. EDT, the Treasury will sell $12 billion 10-year Treasury Inflation-Protected Securities, which kicks off a new auction cycle with one 10-year TIPS sale for every other month going forward.

"We may have run our course to lower yields at least short term," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. "Supply should keep pressure on the market, especially with stocks trading higher."

As of 9:50 a.m. EDT, the benchmark 10-year note was down 15/32 to yield 3.034%, and the 30-year bond was 28/32 lower to yield 4.003%. Bond yields move inversely with their prices.

The 10-year note's yield, the benchmark for consumer and corporate borrowings, earlier touched 3.051%, the highest level since 3.113% on June 28. The yield dropped to 2.878% on July 1, the lowest level since April 28, 2009.

Treasurys have rallied significantly in recent weeks, with the 10-year note's yield dipping more than 80 basis points in the second quarter amid anxiety that the economic recovery could falter in the second half of the year. Traders noted that the recent fall in yields has priced a lot of bearish news on the economy. Now with some data easing the concern, many investors cut bets on further decline in bond yields.

The number of U.S. workers filing initial claims for jobless benefits declined 21,000 to 454,000 in the week ended July 3. Economists surveyed by Dow Jones Newswires had expected claims would fall 12,000. That last time claims dropped so much was in mid-April. The previous week's level was revised upward, however, to 475,000 from 472,000.

The four-week moving average, which aims to give a better idea of the trend by smoothing volatility in the data, went down by 1,250 to 466,000 in the week ended July 3. The prior week's average was revised to 467,250.

"The perception is that the employment picture was a bit better and bonds were overbought," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. He said the next key level for the 10-year yield is 3.09%.

Lou Brien, a market strategist with DRW Trading Group in Chicago, said bond yields still could go lower, given the prospects of further easing in inflation pressure. Inflation is the main threat to bonds' fixed return over time, particularly long-dated securities.

"It is inflation and inflation expectations that are the key to the big picture moves in the long-end Treasurys," Brien said. "Markets don't go in a straight line."

Still, Brien said that if the rally in U.S. stocks can be extended for a few days more, it is possible that the 10-year yield goes back to about 3.18%.