Treasurys ease on housing data

Government bond prices fall after a report showed that housing starts rose in June, a positive sign for the staggering housing market.

July 17, 2009: 1:05 PM ET

NEW YORK (Reuters) -- U.S. Treasury prices fell Friday after the government said U.S. housing starts rose in June, bolstering prospects for economic recovery and damping demand for safe-haven U.S. government debt.

Talk of a buyer for struggling CIT Group Inc (CIT, Fortune 500), a U.S. lender to hundreds of thousands of small- and medium-sized businesses, added to pressure on Treasurys, traders said.

"Housing starts, without a doubt, are why the market is down," said William Sullivan, chief economist at JVB Group in Boca Raton, Florida. "We were trading up overseas until 8:30 a.m. (EDT) when we got news of this surprising rebound in housing starts and building permits. That's viewed as a healing process in the economy which in turn reduces the demand for liquidity assets such as Treasury securities."

New U.S. housing starts rose a bigger-than-expected 3.6%, propelled by a 14.4% rise in single-family home starts, the Commerce Department said, the latter the biggest rise since December 2004.

Benchmark 10-year Treasury notes fell 18/32 in price in mid-morning trade, their yields rising to 3.65% from 3.56% late Thursday.

"This is another piece of data for those who see the recession ending soon," said William O'Donnell, head treasury strategist at RBS Securities in Greenwich, Connecticut.

An end to the recession would tend to favor riskier investments like stocks and corporate bonds, rather than safe-haven Treasurys.

Economists generally view the manufacturing sector as slowly stabilizing so the possibility of an end to the recession in the housing sector would neutralize what has been a big contributor to the steepest downturn in the economy since the Great Depression.

"The housing starts rise is very convincing evidence of the potential for the general housing market to improve," Decision Economics senior economist Pierre Ellis in New York.

Traders and analysts said speculation about a possible buyer for CIT Group Inc. also weighed.

"If there's some deal worked out on CIT that's a mild negative for Treasurys because it reduces that flight to safety and quality," Sullivan said.

CIT declined to comment on a report that JPMorgan Chase & Co (JPM, Fortune 500) was a suitor for its factoring unit.

John Spinello, senior vice president and chief fixed-income technical strategist at Jefferies & Co. in New York, said the market could be overreacting a bit to the housing data.

"(Housing starts) were good. No question. It was the first time we saw multiple months of increase since 2007, but they're still at very low levels," he said.

But thin summer, pre-weekend trading could be exaggerating the market's move, Spinello said.

"The market is a little bit thin. We expect the 3.63% (level of the 10-year yield) to hold and draw some buyers," Spinello said. "Right now with no supply in the marketplace, we could probably range-trade into supply."

The Treasury's next auction of anything other than short-term debt is July 27 when the government sells 20-year TIPS. It will sell two-year notes on July 28.

Two-year Treasury notes were down 1/32 in price Friday, their yields rising to 1.01% from 0.98% Thursday.

Five-year Treasury notes fell 9/32 in price, their yields rising to 2.51% from 2.44% late Thursday.

Thirty-year Treasury bonds fell 28/32, their yields rising to 4.50% from 4.44% Thursday.