U.S. government debt advanced a second day, the first two- day gain this month, as the U.S. producer-price index was unchanged in August. Equities fell as a report showed foreign direct investment in China last month recorded the first back- to-back decline of more than 10 percent since 2009. U.S. 10-year yields touched the highest level since July yesterday on speculation the Fed will indicate it's moving closer to raising interest rates.
“This week is about the Fed and Scotland — everything else is a side show to the big show,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Most certainly we had over oversold conditions. They reversed.”
The U.S. 10-year yield dropped two basis points, or 0.02 percentage point, to 2.57 percent at 9:01 a.m. in New York, according to Bloomberg Bond Trader data. The 2.375 percent note due August 2024 rose 1/8, or $1.25 per $1,000 face amount, to 98 9/32.
“I would overweight 10s because they look a bit oversold,” said Ader, who expects the 10-year yield to end the year at 2.65 percent. The median year-end forecast of 71 economists and strategists in a Bloomberg survey is 2.79 percent.
Bank of America Merrill Lynch's MOVE Index, which measures price swings in Treasuries based on options, climbed to 66.09 yesterday, the most since April 2.
Net Shorts
Investors in Treasuries raised bets the prices of securities would drop in value in the week ended yesterday to the most in eight years, according to a survey by JPMorgan Chase & Co.
The proportion of net shorts, or bets prices will decrease, rose to 29 percentage points, matching the most since May 2006, according to JPMorgan. The figure is up from from 25 percentage points the previous week. Outright shorts climbed to 42 percent, equaling the highest since July 2006, and up from 36 percent. Outright longs increased to 13 percent from 11 percent, while neutrals declined to 45 percent from 53 percent.
Treasury 10-year yields reached 2.62 percent yesterday, the most since July 7, on speculation the Fed will delete reference to interest rates staying low for a “considerable time” when it issues its policy statement tomorrow.
The odds the central bank will increase its benchmark rate by July 2015 have risen to 56 percent from 51 percent at the end of August, federal fund futures show.
Economic Indicators
Treasuries were supported today as the U.S. producer-price index was unchanged after a 0.1 percent rise in July, a Labor Department report showed in Washington. The median estimate in a Bloomberg survey called for no change. Over the past 12 months, wholesale prices rose 1.8 percent.
Foreign direct investment into China, a gauge of external confidence, slumped to a four-year low amid antitrust probes into multinational companies that have spurred a letter of complaint from the U.S. The drop in August followed a 17 percent plunge in July.
Industrial production in the U.S. unexpectedly declined in August for the first time in seven months, a report showed yesterday.
'Jittery' Investors
“Weaker equities driven by disappointing U.S. and Chinese data are the main factors as investors nervously await tomorrow's Fed announcement,” said Nick Stamenkovic, a fixed- income strategist at broker RIA Capital Markets Ltd. in Edinburgh, referring to today's move. “Investors are jittery.”
The 10-year yield will rise to 3 percent by the end of this year, Stamenkovic said.
The U.S. central bank is reducing the amount of bonds it purchases to support the economy and is on track to end the program this year. Policy makers have kept the target for the benchmark interest rate in a range of zero to 0.25 percent since December 2008.
The Treasury Department is scheduled to issue today data on foreign demand for U.S. assets in July. China and Japan, America's largest overseas creditors, both trimmed their holdings of Treasuries in June.
'Strong Selloff'
“There's uncertainty this week over the Fed and the Scottish referendum,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “There is some spillover from changing risk sentiment. We've had a pretty strong selloff this month and it's quite normal to see this kind of move back.”
The Stoxx Europe 600 Index of shares dropped 0.6 percent, while the MSCI Asia Pacific Index lost 0.5 percent in its ninth consecutive retreat.
U.K. bonds have outperformed Treasuries over the past week, even as both markets fell, on speculation Scotland's independence vote on Thursday will lead the Bank of England to keep interest rates lower for longer.
Gilts fell 0.4 percent in the week ended yesterday, versus a 0.5 percent decline for Treasuries, based on Bloomberg World Bond Indexes.
Ten-year gilts yield about four basis points less than similar-maturity Treasuries. The British securities yielded 16 basis points more as recently as June.
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