NEW YORK: US government debt prices fell on Monday as traders trimmed bond holdings after surprisingly strong data on the US services sector and before auctions of new coupon supply.
Profit-taking after last week's late rally - sparked by a weaker-than-forecast July employment report - also weighed on bond prices, as did a little lightening of positions ahead of Treasury refunding auctions this week, traders said.
US bond prices erased just some of Friday's rise in advance of this week's August refunding, during which the Treasury will sell $72 billion worth of coupon-bearing debt.
"Bond prices fell on a combination of an early morning pullback after Friday's rally before supply this week, and then the stronger-than-expected ISM Non-Manufacturing data," said John Briggs, managing director, markets at RBS in Stamford, Connecticut.
The Institute for Supply Management's index on the US services sector rose to 56.0 in July from 52.2 in June, signaling ongoing improvement in retail, restaurant and other services industries. Analysts had forecast a July reading of 53.0.
The latest ISM services figure matched the level last seen in February and rebounded from a three-year low.
SUPPLY AHEAD
The Treasury Department will sell $32 billon in three-year debt on Tuesday, $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday.
With yields hovering near two-year highs, the upcoming supply might attract buyers, traders said.
The bidding deadline for the three-year note auction is 1 p.m. EDT (1700 GMT) on Tuesday. The $32 billion size of the three-year sale has been steady since October 2010.
Contrary to some expectations, the Treasury did not cut the size of this auction. But it did say at last week's press briefing that it would cut two- and three-year coupon auction sizes in the future, though the cuts would be a relatively small $1.0 billion for each issue per month over the next few months.
Stone & McCarthy analysts said that depending on the fiscal picture, more cuts to this issue could come after Treasury launches its floating rate note program in January.
The Fed is also expected to buy $4.75 billion to $5.75 billion in Treasuries in the May 15, 2018, to April 30, 2019, sector on Tuesday, noted Thomas Simons, money market economist at Jefferies & Co. in New York.
On the open market, benchmark 10-year notes slipped 9/32 in price to yield 2.64 percent, up from 2.60 percent late on Friday.
The 30-year bond was down 23/32, its yield rising to 3.73 percent from 3.69 percent late on Friday.
Investors exiting weekend safe-haven positions due to US embassy closures in the Middle East and Africa after an al Qaeda threat also caused Treasury yields to rise.
While US payrolls grew by 162,000 last month, falling short of traders' expectations, analysts said the slower hiring might not be enough to keep the Federal Reserve from scaling back its bond-purchase stimulus as early as September.
Nancy Vanden Houten, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, said she believed the Fed would announce some cutbacks in bond purchases at its September policy meeting and begin to carry them out in October.
A couple of factors could color that decision, though, she said. Disappointing job growth in August, for instance, could make the Federal Reserve more reluctant, or cautious, about reducing its monetary stimulus.
Another is a potential showdown over the debt limit, Vanden Houten said. If Congress refuses to raise the debt limit, that could add to the US fiscal restraint that many say is already hampering the economy's recovery.
"Still, on a summer Monday right after the monthly jobs report, we should not make too much of today's move," she said.
Remarks from Dallas Fed President Richard Fisher seemed to have little impact on bonds.
"He said nothing that was new for him. He's slightly hawkish and said tapering is on the horizon," Vanden Houten said.
Services industries slowed their hiring in July and suppressed overall payroll growth. That disappointed investors and reduced bets the Federal Reserve might cut its monthly bond purchases later this year.
The central bank bought $1.496 billion in Treasuries that will come due in February 2036 through November 2042, under its quantitative easing program.
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