Treasurys swing lower ahead of Fed meeting

New York (June 16)  Treasury prices swung mostly lower Monday after a round of strengthening economic data, as the market prepared for a meeting of the Federal Reserve.

The benchmark 10-year note  10_YEAR -0.04%    yield, which rises as prices fall, was up half a basis point on the day at 2.610%, according to Tradeweb. The 30-year bond  30_YEAR -0.21%    yield rose slightly to 3.413%

Treasurys were higher in morning trade, but gradually swung lower after a series of solid economic numbers. Bonds cut some gains after a report showed industrial production rose 0.6% in May, bouncing back from a 0.3% drop in April. Economists had expected a 0.5% gain.

Homebuilder confidence also rose to its highest in five months, coming in at a 49 reading, compared with expectations of 47. New York regional manufacturing data showed activity held steady in June. The index edged up to 19.3 in June from 19.0 in May, beating expectations of a drop to 16.7.

As economic data continue to improve, bond investors will be looking ahead to a policy statement and news conference by the Federal Reserve on Wednesday. Market participants are watching for clues about when and how the central bank may raise its key interest rate, which has been held near zero for the past five years.

Traders who bet on the future path of the fed funds rate currently project a first rate hike occurring in June of next year, according to CME FedWatch. The Treasury yields most sensitive to shifts in Fed monetary policy rose on Monday, with the 3-year note  3_YEAR +2.24%    yield up 1.5 basis points at 0.947%, and the 5-year note  5_YEAR +0.83%    yield up a basis point at 1.706%.

Nonetheless, with most central banks keeping policies accommodative, the Fed may stay that way as well. “I think what we’ll hear from the Fed again is that they are in no hurry to raise the fed funds rate,” said Jim Kochan, chief fixed-income strategist at Wells Fargo Asset Management.

Deutsche Bank research strategists led by Francis Yared wrote late Friday: “The market is more dovish than even a conservative interpretation of the March FOMC projections. Given the improvement in the unemployment rate and core inflation since March, the June FOMC projections are unlikely to be lowered to meet current market pricing.

Treasurys traded higher in the morning amid growing fears about violence in Iraq. With a radical Sunni group firmly in control of some of the western territories of Iraq, the United States was preparing to coordinate with Iran, both of whom committed to supporting Iraq’s Shiite prime minister. Photos posted on Twitter showed what Sunni militants claimed to be a mass execution of Shiite soldiers. Those developments helped give a boost to the safety of U.S. Treasurys.

Source: MarketWatch