The Wall Street Journal
24 April 2014
Treasury bonds rose Wednesday as a weak U.S. housing report deflated optimism over the economic outlook and stoked demand for haven assets.
Geopolitical tension in Ukraine and concerns about China’s economy also boosted the U.S. government-debt market.
In afternoon trading, the 10-year note was 11/32 higher, yielding 2.684%, according to Tradeweb. When bond prices rise, their yields fall.
The yield is a global benchmark for setting long-term borrowing costs for consumers and businesses. It traded at 3.03% at the end of last year.
An unexpected 14.5% drop in new-home sales in March raised concerns about whether the U.S. economy could shake off the recent weakness driven by harsh winter weather. Analysts said any further weakness in the housing market would bolster the Federal Reserve’s case for taking its time to withdraw monetary stimulus – that stimulus has played a big part in keeping bond yields near historically low levels following the 2008 global financial crisis.
“It suggests a weaker recovery than people expected especially as March data should not be as weather impacted,” said Priya Misra, head of U.S. rates strategy research at Bank of America Merrill Lynch in New York. The report “should argue for a longer on hold Federal Reserve, hence lower bond yields.”
The 10-year Treasury yield rose more than one percentage point last year, driven by the prospect of reduced bond buying from the Fed. But the yield has fallen this year even as the Fed has reduced bond buying since January. Uncertainty over the global growth outlook soothed fears the Fed may quicken the pace of withdrawing stimulus, renewing buying interest in Treasury bonds.
Analysts expect the 10-year yield to stay in the range of 2.6% to 2.8%, which has dominated trading since February, until data signals U.S. economic growth will accelerate.
“The Fed is data dependent and we may need several months of data to get clarity on the economy,” said Jason Evans, co-founder of hedge fund NineAlpha Capital LP in New York. “My base case is still that bond yields will slowly and orderly drift higher.”
Investors have kept an eye on simmering tensions between Ukraine and Russia over the past week. Russia’s Foreign Minister Sergei Lavrov said Wednesday any attack on Russians in Ukraine will be perceived as an attack against Russia. The comments came as Ukraine called for a renewal of a stalled military operation against pro-Russian forces that have taken over several cities in the eastern part of the country.
“There is little upside to the global economy and risky assets of further escalation in the Ukraine,” said Michael Woolfolk, global markets strategist at BNY Mellon Capital Markets LLC. “Consequently, we are seeing renewed selling of Russian government bonds and increased buying of core government bonds” such as U.S. Treasurys, he said,
In China, a report Wednesday showed a gauge of manufacturing rose to 48.3 in April from March’s final reading of 48.0, but a reading below 50 signals contraction. Chinese stocks fell, reflecting ongoing concerns about the health of the world’s second largest economy and a big buyer of commodities.
Wednesday’s price strength in the bond market tempered some buying interest in a $35 billion sale of five-year notes.
The Treasury paid a yield of 1.732% to sell the new five-year notes, the highest level since 2011. The auction drew $2.79 in bids for each dollar offered, close to the average of $2.75 per dollar for the past four sales. Demand from investors-instead of dealers-remains decent with total bidding of 63.5%.
A sale of $29 billion in seven-year notes is due Thursday, the last leg of this week’s $96 billion in new Treasury notes supply.
COUPON ISSUE PRICE CHANGE YIELD CHANGE 3/8% 2-year 99 28/32 up 1/32 0.442% -1.4BP 7/8% 3-year 99 30/32 up 2/32 0.894% -2.6BP 1 5/8% 5-year 99 19/32 up 5/32 1.709% -3.7BP 2 1/4% 7-year 99 27/32 up 8/32 2.272% -3.9BP 2 3/4% 10-year 100 18/32 up 11/32 2.684% -4.2BP 3 3/4% 30-year 102 28/32 up 20/32 3.469% -3.4BP 2-10-Yr Yield Spread: +224.2 BPS Vs +231.5 BP Source: Tradeweb
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