By: Ye Xie and Michael Mackenzie

Treasuries declined as stronger-than-expected data on home sales and consumer confidence underscored the resilience of the US economy, fueling bets that the Federal Reserve will resume raising interest rates after this month’s pause.

The drop was led by shorter-dated securities most heavily swayed by movements in the Fed’s key benchmark rate. Five-year yields rose as much as 7 basis points to about 4.04%, with similar jumps in other notes with earlier maturities. The moves were exacerbated by a large block trade in the two-year bond futures. The market was near its session yield highs after an auction of $43 billion of five-year notes was a little softer than forecast at 1 p.m. New York time.
The surprising strength of the economic data comes on the heels of Fed Chair Jerome Powell’s recent testimony on Capitol Hill, where he emphasized that the central bank is likely to resume tightening monetary policy after holding steady at this month’s meeting.

Traders in the derivative markets have fully priced in another quarter-percentage-point increase at the Fed’s September meeting, with some possibility for a further increase in November. They have also trimmed the odds for a rate cut by year-end.

The bond selloff came after a government report showed new home sales jumped in May to the strongest since February 2022 and a Conference Board survey showed consumer confidence increased this month to the highest level since the start of last year.

“It does seem that housing is firmer than many expected given the rate increases and a firm housing market is a little problematic for the Fed,” said Gregory Faranello, Head of US Rates Trading and Strategy for AmeriVet Securities. “The Fed legitimately feels they can move one or two more times given the data we have seen.”

Another report Tuesday showed that durable goods orders increased, signaling that companies continue to make long-term investments despite the Fed’s steep increase to borrowing costs.