NEW YORK - Treasury yields rose on Monday as orders for capital and durable goods in May increased more than expected, while pending home sales surprised to the upside from the previous month as the U.S. economy showed strength before a big interest rate hike.
The yield on the benchmark 10-year note rose 4.6 basis points to 3.170% and the two-year's yield, which typically heralds rate expectations, gained 2.2 basis points to 3.079%.
Orders for U.S.-made capital goods and shipments increased solidly in May, pointing to sustained strength in business spending on equipment in the second quarter, while durable goods orders advanced 0.7% after rising 0.4% in April.
The National Association of Realtors (NAR) said on Monday its Pending Home Sales Index, based on signed contracts, rose 0.7% last month to 99.9, rebounding from a two-year low in April but plunged 13.6% in May on an annual basis.
"I'm watching closely to see the effects of higher rates and how that's going to play out the next three to six months," said Mauricio Agudelo, head of fixed income investments at Homestead Funds in Arlington, Virginia. "I'm looking at the value of home prices and the affordability of housing in general."
The Federal Reserve hiked the federal funds rate by 75 basis points two weeks ago and is expected to do the same in July as part of an aggressive plan to corral soaring inflation.
The Fed has cited a strong labor market as reason that higher rates will not force the economy to slow sharply or tilt into recession. However, rising rental rates are creating headwinds for housing affordability, Moody's Analytics said on Monday.
The percentage of rent-burdened metro areas, where the rent-to-income ratio is above 30%, has jumped to 23 from eight since late 2019. Rentals rose 2.5% in the first quarter and likely will rise close to the same in the second quarter, Moody's said.
The U.S. Treasury will sell $46 billion in two-year notes and $47 billion in five-year notes on Monday, with results announced at 11:30 a.m. and 1 p.m., respectively.
Another $40 billion of seven-year notes will be sold on Tuesday, the last of the week's auctions before the long Fourth of July holiday weekend. The yield on the 30-year Treasury bond was up 4.8 basis points to 3.306%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 8.9 basis points. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.845%.
The 10-year TIPS breakeven rate was last at 2.584%, indicating the market sees inflation averaging about 2.6% a year for the next decade. The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.518%.
(Reporting by Herbert Lash, Editing by Mark Heinrich)