US Treasury debt prices extended the week's losses on Thursday, ending the quarter on a weak note at odds with the bond market's overall move up over the last three months. Treasuries suffered from investors' waning appetite for safety as Greece approved austerity measures needed to avert a debt default. On the domestic front, data collected by Chicago-area purchasing managers showed stronger activity in the US Midwest than economists had predicted.
Bond yields moved higher on the report, encouraging the "risk-on" trade that has come at the expense of bonds, said John Brady, vice president of MF Global in Chicago. Thursday also marked the end of large-scale asset purchases by the Federal Reserve, in a program of quantitative easing, or QE2, designed to keep longer-term interest rates low and stimulate the economy.
The benchmark 10-year Treasury note fell 17/32 in price, its yield rising to 3.17 percent from 3.11 percent on Wednesday, but still 30 basis points lower than 3.47 percent where it stood on March 31, the end of the first quarter. Meanwhile, technical levels gave way to a trend toward higher yields, with the 10-year note breaking its 200-day moving average of 3.14 percent, and the five-year note hitting its 200-day average of 1.78 percent.
News that Greek and European leaders had made progress on avoiding a default on Greek debt took the safe-haven appeal away from Treasuries starting on Monday, and selling continued as more reassuring developments emerged in Europe. The Greek parliament voted for a mid-term austerity plan, paving the way for aid from the European Union and the International Monetary Fund to help that nation pay its debts.
The good news on the European debt story shifted some focus to the political conflict over raising the US debt ceiling. Kathy Jones, fixed-income strategist at Schwab Center for Financial Research, said the impact on markets of the United States not managing to raise the debt ceiling in time was unknown, but would "send the wrong signal" about the ability of the United States to conduct a civil discourse and make decisions.
S&P said on Thursday it would downgrade the United States from AAA to D if it missed its debt payment on August 4, two days after the August 2 date the Treasury Department has given as the deadline for raising the debt ceiling. In late trade, the 30-year bond was down just 2/32, its yield steady at 4.48 percent.
The five-year Treasury note lost 12/32 in price, its yield rising to 1.77 percent from 1.69 percent on Wednesday. As the first half of the year ended, US investment grade bonds had posted a 2.96 percent gain through Wednesday. Treasury Inflation-Protected Securities lead the way with a 5.97 percent rise, followed by municipal bonds, up 4.59 percent, then junk bonds, up 4.55 percent. Treasuries lagged, up 2.41 percent, according to Barclays Capital.
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