Bonds Gain As Likelihood Of Greek Default Intensifies

Investors in Treasuries are breathing a sigh of relief after a report on retail sales showed the U.S economy growing at a steady pace but not a spectacular one, sparking the biggest rally in a month for government bonds.

Traders had sent the yield on the benchmark 10-year note to an eight-month high before the report on concern that May retail sales would exceed the 1.2% median estimate and move the Federal Reserve closer to raising interest rates. Yields declined the most since May 15 after the sales figure was in line with expectations and amid a rally in European debt that helped boost the relative attractiveness of U.S. government bonds.

“The market is good at getting ahead of things,” said Robert Tipp, chief investment strategist in Newark, N.J., for Prudential Financial’s fixed-income division, which manages $ 560 billion. “Part of the push higher in yields has been in anticipation of the rebound from weak data we’ve had in winter.”

The 10-year note yield fell 10 basis points to 2.38% at 4:07 p.m. New York time, according to Bloomberg Bond Trader prices, after it touched 2.4985%, the highest since Oct. 1. The yield on the 30-year bond dropped by 12 basis points to 3.10% after trading Wednesday at the highest level since September.

Bonds added to gains after the Treasury Department’s sale of $ 13 billion in 30-year bonds attracted higher than average demand.

The decline in Treasury yields Thursday comes as securities, from German bunds to Spanish and Italian government bonds, rallied on optimism that negotiations aimed at securing funding for Greece are progressing.

“You had a big reversal in European government bonds,” said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “Most of the selling pressure we’ve seen was coming out of Europe, and the reversal took pressure off Treasuries.”

Traders have been raising expectations for when the Fed will tighten monetary policy since the May employment report exceeded forecasts.

Fed fund futures give a 55% probability that the central bank will lift rates in September, up from 52% June 8, according to data compiled by Bloomberg.

Investors have remained bearish on Treasuries as recent economic data have signaled strength. The proportion of net shorts, or bets that the price of Treasuries will decrease, was at 30 percentage points in the week ending June 8, compared with 32 percentage points the previous week, according to according to a survey by JPMorgan Chase.

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