Treasury bond prices fell for the third consecutive session Monday, sending yields to two-week highs, as the latest set of economic data suggested the economy continues to strengthen.
Just before 3:30 p.m. ET, the price of the benchmark 30-year Treasury bond fell 1-8/32. Its yield, which moves inversely to the price, rose to 6.06 percent from Friday's close of 5.97 percent.
Bonds immediately began falling after the Commerce Department said sales of new homes rose 0.1 percent to a seasonally adjusted annual rate of 980,000. The rate, well above expectations, is the second-highest ever and suggests the robust housing market is not letting up.
Already, fears of an overheating economy have led the Federal Open Market Committee to raise short-term interest rates by a quarter percentage point in both June and August.
Monday's housing data, coupled with a series of strong economic data this week, could provoke fears of another rate hike when the FOMC meets in October.
Already, traders are looking toward Wednesday, when the National Association of Purchasing Management releases its closely watched index of manufacturing activity, which is expected to rise to 54.5 from 53.4 in July.
"NAPM could be quite strong," said Josh Stiles, bond strategist at IDEA Global.com.
Anthony Crescenzi, bond market strategist with Miller Tabak Hirsch & Co., agreed.
"What we're seeing is an increase in the manufacturing sector," Crescenzi said "The manufacturing sector has been very weak for the last year and a half -- since the Asian (financial) crisis. Now, that sector seems to be recovering."
A strong rebound in manufacturing, Crescenzi said, could lead to a 4 percent economic growth rate -- a number not consistent with low inflation.
On Friday, the Labor Department releases August employment figures. Analysts expect the unemployment rate to remain unchanged at 4.3 percent, near a 30-year low, with employers adding 206,000 non-farm jobs during the month.
Full circle
Explaining Monday's sell-off, traders also cited profit taking, saying the two-day bond rally following Tuesday's FOMC rate hike may have been overdone.
Yields have "gotten back to where they were before they tightened," said Bruce Alston, who manages $1.5 billion in bonds for Value Line Asset Management.
Also bearish for bonds, the price of oil Monday rose to its highest level since October 1997. Further, traders are worried about the market's ability to absorb an estimated $20 billion in new corporate bonds expected to sell in September.
But analysts also noted the day's light trading volume, which can exaggerate the significance of price movements.
"It's low volume, so a little selling goes a long way," Value Line's Alston said.
Dollar weakens
Further weighing on Treasurys, the dollar fell sharply against the yen. Just before 3:30 p.m. ET the U.S. currency slipped to 110.69 yen, almost a 1 percent drop from Friday's close of 111.77.
The yen over the last several weeks has continued to strengthen against the dollar, helped by Japan's surging stock market and the belief the Asian nation is recovering from recession.
Looking ahead, Tim Fox, currency analyst at Standard Charter Bank, sees the yen pushing higher against the dollar as long as Japanese stocks continue to gain.
"A crucial aspect is going to be the Nikkei," Fox said of Tokyo's benchmark stock index. "The Nikkei has been driving the yen higher, trying to latch on to the strength of the Japanese stock market. If that continues, then dollar-yen will persist through that sort of 110 (yen) area, and perhaps break (through to) 108 later this year."
The dollar, meanwhile, weakened slightly against the euro.
Just before 3:30 p.m. ET, it cost $1.0463 to buy one euro compared with $1.0455 Friday, a 0.08 percent drop in the dollar's value.
