US Treasuries fell and yields rose yesterday, inverting the yields on two- and 10-year notes again

Treasuries lower on strong data
By Jennifer Hughes in New York and David Turner in Tokyo
Published: February 2 2006 02:00 | Last updated: February 2 2006 02:00

US Treasuries fell and yields rose yesterday, inverting the yields on two- and 10-year notes again as investors eyed heavy supply coming next week and economists highlighted underlying strength in the day's data.

Relatively firm manufacturing and construction data buoyed expectations of a strong employment report tomorrow. The market is becoming more sensitive to figures following the Federal Reserve's emphasis on data to determine the extent of further rate rises.

"Data between now and the refunding [next week] is skewed to strength and will contribute to this pressure," said David Ader, strategist at RBS Greenwich Capital.

Next week, the Treasury will sell $21bn in three-year notes, $13bn in 10-year notes and $14bn in 30-year bonds as part of its quarterly refunding.

By late morning in New York, yields on two- and 10-year notes were both up4.6 basis points at 4.574 per cent and 4.567 per cent respectively.

Eurozone government bonds tracked their US counterparts and fell as traders tested technical levels.

Yields on Germany's 10-year Bunds hit their highest levels since late November, up 6.9bp at 3.521 per cent in late European trade.

"This is the third time yields have popped their head over this particular [3.5 per cent] parapet," said Eric Wand at 4Cast consultancy.

He noted that while the moves had been met with buying interest on the previous occasions, tomorrow's sale of French 10-year bonds might give traders a reason to nudge yields higher still in order to win a better coupon on the new paper.

Chatter in the UK gilt market centred around the Debt Management Office meeting with market dealers, who called for more longer-dated paper to meet demand.

Bonds were weakened too by firm manufacturing data, which led investors to further trim rate cut hopes.

Yields on 10-year gilts were up 4.6bp at 4.194 per cent.

Japanese government bonds rose and yields fell, prompted by the first decline in the Japanese equity market in six sessions. The yield on the benchmark 10-year dropped 1.5bp to 1.545 per cent.

Bonds were also supported by the latest warning against premature monetary tightening. Kaoru Yosano, economy and banking minister, said it was too early "to say officially that we've escaped deflation".