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Treasuries fall as report shows consumer spending rose in May

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(Bloomberg) – Treasuries fell for the third time in four days after reports showed the U.S. economy gaining momentum as the Federal Reserve moves closer to raising interest rates.

Consumer spending rose in May by the most in almost six years, Commerce Department figures showed in Washington. Treasury investors are caught balancing U.S. economic data and developments in Greece’s negotiations with creditors that have failed to produce an accord on aid.

“That is a really good spending data point,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “Overall the data is certainly better in the second quarter. It keeps the Fed on track to raise rates this fall.”

The Treasury 10-year yield increased four basis points, or 0.04 percentage point, to 2.41 percent as of 9:08 a.m. New York time, according to Bloomberg Bond Trader data. The 2.125 percent note due in May 2025 fell 9/32, or $2.81 per $1,000 face value, to 97 18/32. The yield increased 15 basis points in the previous two days.

Purchases increased 0.9 percent in May, the biggest gain since August 2009, after rising 0.1 percent in April. The median forecast of 75 economists in a Bloomberg survey called for a 0.7 percent advance. Incomes rose 0.5 percent for a second month.

A separate report showed jobless claims held below 300,000 for the 16th straight week, signaling a tighter labor market.

Greece uncertainty

“The more evidence that comes in that the economy has picked up from a first-quarter lull and the labor market is continuing to tighten, the more confidence we will have that the Fed will begin to normalize rates, and that will put upward pressure on yields,” said John Stopford, head of fixed income at Investec Asset Management Ltd. in London, before the reports were released.

Optimism on a deal being reached with Greece at the start of the week dragged down the U.S. benchmark 10-year government note as the demand for haven assets faded. This turned on Wednesday after Greece’s Prime Minister Alexis Tsipras said some creditors didn’t accept proposals to unlock aid.

“There is a fairly high expectation among market participants that there will be some resolution in Greece and that provides some support to yields,” Investec’s Stopford said. “We are cautious about chasing yields higher just because of the uncertainty that comes with Greece.”

Fed Chair Janet Yellen acknowledged this month there may be spillover to the U.S. in the event Greece did not reach a deal, which could affect the path of American policy. She also reiterated that the decision on when to raise borrowing costs for the first time since 2006 will depend primarily on the evolution of U.S. economic data.

Auction yields

Traders betting on rising rates have pushed U.S. borrowing costs at auctions to the highest levels this year.

The Treasury is scheduled to auction $29 billion of seven- year securities on Thursday. The debt due to be sold yielded 2.145 percent in pre-auction trading, compared with 1.888 percent at a previous auction on May 28.

Demand at a sale of $35 billion of five-year notes Wednesday was below average. It drew a yield of 1.71 percent, the highest since December. The U.S. auctioned $26 billion of two-year debt on Tuesday at a yield of 0.692 percent, also the most since December.