US Treasury prices fall

US Treasuries fell in holiday-thinned trade on Tuesday as a firm stock market and surprisingly strong factory orders offset weak data on housing and any lingering safe-haven bid on global security concerns. Bonds briefly trimmed their losses after a report showed pending sales of existing US homes in May unexpectedly fell to their lowest level in more than 5-1/2 years.
The rise was short-lived, however, as May factory orders posted a much smaller fall than predicted and April's rise was revised higher. Sellers stepped in after the market's second attempt this week to push benchmark yields decisively below 5 percent failed.
Globally, bonds appeared to return to normal after Monday's safe-haven rise in response to recent attempted bomb attacks in the UK. Euro zone and British government bonds both slid with the help of supply-related issues.
Dealers said Treasuries volume was well below normal due to Tuesday's early close ahead of the July 4 holiday, causing volatile trade. Meanwhile no major new worries on global security or the troubled US subprime mortgage sector emerged to put a bid back into bonds.
"Nothing has happened, geopolitically or on subprime. No news is bad news for bonds and good news for the economy," said Ajay Rajadhyaksha, co-head of US fixed income strategy at Barclays Capital in New York. "In general the data has been mixed but it hasn't been weak at all. Factory orders fell to a much lesser extent than expected and yesterday's ISM manufacturing number was strong."
Prices on benchmark 10-year notes fell 14/32, pushing yields up to 5.05 percent from 4.99 percent late on Monday. It was the biggest one-day rise in 10-year yields in three weeks. Two-year notes fell 2/32, pushing yields up to 4.89 percent. The 30-year long bond fell 25/32 to yield 5.14 percent.
The factory orders report follows a strong manufacturing reading from the Institute for Supply Management. Together, they allowed yields to rise after hitting their lowest in nearly a month on Monday on worries over the events in the UK. Meanwhile, dealers said there was a variety of other factors in play as well, including a drag from euro zone government debt.
"We have run into resistance a little below 5 percent yield for 10-year Treasuries," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi. "There is an auction of Bunds tomorrow and their market seems to be leading us by the nose today. Stocks are up a little: that might do something. Small movements in US equity prices are affecting us," Rupkey added.
The pending home sales highlighted concerns that the troubled housing sector was damping the economy. However, with yields already well below the Federal Reserve's 5.25 percent target for overnight money, the market still factors in an element of economic weakness.
It would take a surprisingly weak reading on job growth in Friday's labour market report and an uptick in unemployment to spur bond bulls from here. "It is the one piece of the puzzle that most likely needs to show a sizable shift before the Fed is realistically in play," said Ian Lyngen, interest rate strategist at RBS Greenwich Capital in Greenwich, Connecticut, said referring to the unemployment rate and its implications for the bond market.