Treasuries unchanged ahead of rate decision

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US Treasuries were largely rangebound on Monday as investors failed to react strongly to unexpectedly robust new home sales data, preferring instead to focus on Thursday’s Federal Reserve decision on interest rates.

Sales of new homes rose by 4.6 per cent last month, more than economists had expected.

“The data won’t affect the near-term outlook on the Fed cycle – which is already fully priced for a quarter point hike on Thursday – though it could help keep the cycle alive a month or two longer,” said analysts at Action Economics.

By late trade in New York, yields had nudged higher, leaving 10-year yields 2.3 basis points higher at 5.247 per cent. Two-year yields, however, were off 0.4bp at 5.266 per cent. The Treasury will auction $22bn in new two-year paper on Tuesday.

There was more direction for European government bonds following a rise in German inflation and signs of a faster pace of house price growth in the UK.

Early June data from individual states suggested price pressures were continuing to build, adding to expectations that rates will soon rise further.

Belgium’s Guy Quaden, a member of the European Central Bank’s governing council, further stoked the mood when, in an interview with the Financial Times, he said that the bank would move at its own pace. This was interpreted as leaving space for the bank to raise rates in early August.

Two-year German Schatz yields were up 3.3bp to 3.572 per cent, while the 10-year bund yield was 1bp higher at 4.088 per cent.

In the UK, short-dated gilts were hit by further evidence of continued strength in house price inflation.

Two-year gilt yields were 1.8bp higher at 4.846 per cent. Ten-year yields, however, were lower at 4.734 per cent, down by 1bp.

Japanese government bond yields rose right along the curve on heightened expectations of further US rate rises and an easing of fears that Toshihiko Fukui, governor of the Bank of Japan, might have to resign over his investment in a controversial fund.

Two leading members of Japan’s cabinet came out in support of Mr Fukui, warning that his resignation could destabilise global markets.

The yield on the benchmark 10-year rose 2bp to 1.900 per cent.

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