(Bloomberg) -- Treasuries fell for the first time in three days, with benchmark 10-year yields rising from a seven-week low, as haven demand ebbed a day after a Malaysian airliner was shot down over Ukraine.
U.S. bonds pared this weeks gains after surging yesterday when the flight from Amsterdam to Kuala Lumpur was downed by a missile and as Israeli troops moved into Gaza. An index of leading indicators for June showed a fifth month of expansion.
There was no real follow-through on the safety bid, said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Federal Reserve. Barring a major outlier, more people are looking at the geopolitical events than todays economic reports.
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.47% at 10:02 a.m. New York time, according to Bloomberg Bond Trader data. The 2.5% note due in May 2024 fell 6/32, or $1.88 per $1,000 face amount, to 100 1/4. The yield dropped to 2.44% yesterday, the lowest level since May 29.
The five-year yield increased three basis points to 1.65%, after dropping seven basis points yesterday.
The U.S. 10-year yield has fallen five basis points this week, after declining 12 basis points in the previous five days. Treasuries have gained 3.6% this year, the Bloomberg World Bond Indexes show. The Bloomberg Global Developed Sovereign Bond Index has returned 5% this year.
The spread between the rate to exchange floating for fixed interest payments and Treasury yields for two years narrowed after reaching its widest in 11 months yesterday as tensions over the Ukraine increased perceived risk in the financial markets.
The difference between the two-year swap rate and the similar maturity Treasury note yield, known as the swap spread, narrowed to 19 basis points after widening to as much as 20.38 basis points yesterday, the widest since Aug. 23, 2013. It reached a low this year of 8.94 basis points on April 23. The measure is a gauge of investor perceptions of credit risk and is based on expectations for the London interbank offered rate, or Libor.
The Conference Board said its gauge of leading indicators, a measure of the outlook for the next three to six months, rose 0.3%, down from a 0.5% gaint in May. The Thomson Reuters/University of Michigans preliminary sentiment index fell to 81.3 from 82.5 in June.
The difference between U.S. five- and 30-year yields shrank to 163 basis points, the least since February 2009, after Fed Chair Janet Yellen told lawmakers this week that while monetary stimulus is still needed, increases in interest rates may occur sooner if the economy accelerates.
Traders see about a 57% chance the Fed will increase its key rate by July 2015, federal funds futures contracts show. The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25% since December 2008.
The Fed may have to raise interest rates sooner than planned as unemployment falls and inflation quickens, James Bullard, president of the St. Louis Fed said yesterday.
If macroeconomic conditions continue to improve at the current pace, the normalization process may need to begin sooner rather than later, Bullard said in a speech yesterday in Owensboro, Kentucky. He doesnt vote on monetary policy this year.
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