Treasuries Drop Amid Mixed Economic Data, $72 Billion Debt Sales

May 14, 2011, 12:49 AM EDT By Susanne Walker

May 14 (Bloomberg) -- Treasuries fell for the first time in five weeks as mixed economic data and a rebound in commodities cooled demand for the safety of U.S. debt.

U.S. 10-year note yields touched the lowest since December yesterday on speculation that inflation may have peaked after the Labor Department reported the consumer price index rose 0.4 percent in April, matching economists’ forecast. The U.S. sold $72 billion in notes and bonds this week and will auction $11 billion in Treasury Inflation Protected Securities next week. The Federal Reserve will release minutes of last month’s policy meeting on May 18.

“Yields being low is because the economy is not generating enough forward momentum to suggest rising commodity prices will be passed through the underlying rate of inflation,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc. “There’s a lot of mixed data and mixed signals and it’s creating a very choppy trading environment.”

Yields on 10-year notes rose two basis points to 3.17 percent in New York, according to Bloomberg Bond Trader prices, from 3.15 percent on May 6. The yield yesterday reached 3.13 percent, the least since Dec. 8. It touched a 2011 high of 3.77 percent in February.

Yield Data

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the break- even rate, narrowed yesterday to 2.39 percentage points from 2.67 percentage points on April 11, which was the widest in three years.

“As we look back at the week and forward to the next, one begins to get the feeling that the U.S. economy is not about to run away from anyone,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote yesterday in a note to clients. “Some of the major issues like housing and jobs are slow to get better.”

The Standard & Poor’s GSCI Index of 24 raw materials moved up by 1.4 percent this week after dropping 11 percent last week. The Standard & Poor’s 500 Index trimmed weekly gains, dropping by 0.8 percent yesterday. The Index dropped 1.1 percent this month through May 12 as gauges of energy and raw-materials producers slumped with metal and oil prices.

Jobs Trend

A report on May 12 showed the number of Americans filing first-time claims for unemployment insurance payments fell less than forecast last week, indicating recovery in the labor market is taking time to accelerate. Applications for jobless benefits decreased 44,000 in the week ended May 7 to 434,000, Labor Department figures showed. Economists forecast 430,000 claims, according to the median estimate in a Bloomberg News survey.

A separate report on May 12 showed sales at U.S. retailers rose in April and the March gain was revised higher, sending Treasury yields higher that day.

“The consumer is still in the game,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It’s not telling you the consumer is retrenching or buying everything off the shelf.”

Off the Shelf

Sales at U.S. retailers April reflected gains at service stations and grocery stores as fuel and food prices climbed.

The 0.5 percent increase was the smallest since July and followed a 0.9 percent March gain that was more than double the previous estimate, Commerce Department figures showed in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.6 percent rise. Sales excluding automobiles and gasoline increased 0.2 percent.

The consumer price index increased 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News and following a 0.5 percent advance in March, figures from the Labor Department showed in Washington. Excluding volatile food and energy, the core gauge rose 0.2 percent, also as projected.

“The inflation data was not great, but not too bad,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 20 primary dealers that trade directly with the Fed. “Most people think the economy is showing signs of life, but it’s also showing signs of troubles. It’s very mixed.”

The Fed has held its target rate for overnight lending between banks at zero to 0.25 percent since December 2008. Policy makers affirmed at their April 27 meeting the plan to buy Treasuries through June in an effort to foster faster economic growth and jobs expansion.

The U.S. sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds this week.

--Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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