Treasury Bonds Trim Price Gains After U.S. Data

Treasury bonds gave up most of their price strength Tuesday as the latest releases pointed to an improving U.S. economy after the soft path earlier this year. Demand for safe assets diminished after a gauge of consumer confidence rose this month at a faster pace than economists forecast while new-home sales surged nearly 20% in May.

In recent trade, the benchmark 10-year note was 1/32 higher, yielding 2.617%, according to Tradeweb. Bond yields fall when their prices rise.

A $30 billion sale of two-year notes is due at 1 p.m. ET Tuesday, the first leg of this week’s $107 billion new Treasury note supply.

Bond prices rose earlier as Bank of England Governor Mark Carney said Tuesday that subdued wage growth suggests there is still some spare capacity to be used up before a rise in the benchmark interest rate is needed.

Mr. Carney earlier this month raised fears when he said a rate increase could come sooner than many investors expect amid signs of the U.K. economy picking up speed.

Also propping up Treasury bonds: a gauge of business confidence in Germany–the euro zone’s biggest economy–decreased more than expected in June amid concerns about the impact of crises both in Ukraine and Iraq.

The data followed Monday’s release showing a preliminary June purchasing-managers index for the euro zone fell to a six-month low, bolstering speculation the European Central Bank may need to pump more cash into the economy in coming months.

“Central bankers are not in a rush to tighten at the moment but the data will still dictate what they do,” said Anthony Cronin, a Treasury bond trader at Société Générale SA. “Trading in Treasurys is likely to be contained between the major data points, but will become more volatile as those data points improve.”

The 10-year yield has traded in a tight range of 2.55%-2.66% over the past two weeks. Trading volume hit a one-month low Monday.

Major central banks have slashed interest rates to near zero following the 2008 financial crisis. The European Central Bank earlier this month even cut one of its key interest rates below zero, aiming to spur banks to lend to consumers and businesses.

ECB President Mario Draghi suggested earlier in June that the bank isn’t done stimulating the economy. The International Monetary Fund has called for the ECB to launch a large-scale asset-purchase program, including buying of government bonds.

Analysts said Tuesday’s upbeat U.S. releases aren’t sufficient to push the Federal Reserve to raise interest rates at an earlier date than the middle of 2015 that many investors currently anticipate.

Fed Chairwoman Janet Yellen said last week the U.S. central bank may keep interest rates low for a considerable period even as debate has grown on signs that inflation is picking up from very low levels.

The 10-year Treasury yield has dropped from 3% at the start of January. Bond prices have been boosted by the uneven pace of global economic growth, geopolitical risk in some developing countries, and record-low interest-rate policies from major central banks.

U.S. government bonds offer superior yields compared with their counterparts in Germany and Japan, drawing global investors seeking relative value among the world’s major government-bond markets.

Analysts and strategists from a number of big global banks still expect the yield to rise to 3% or higher by the end of December. They believe the U.S. economy would accelerate after hitting a soft patch during the harsh winter and that inflation would continue to tick higher from low levels, which would sap demand for Treasury bonds.