By Daniel Kruger
Treasuries rose for the first time in three weeks as US manufacturing fell more than forecast and European Central Bank President Mario Draghi signaled policy makers are likely to start large-scale government-bond purchases.
US 10-year note yields approached the highest level in 15 years against their German peers, stoking demand. The yield curve, the difference between Treasury two- and 30-year yields, flattened to almost the least since January 2009 amid a slump in oil and speculation the Federal Reserve will raise interest rates this year. A report next week may show U.S. unemployment fell to a 6 1/2-year low. “We could continue to see demand from Europe as well as domestically in terms of safety, quality and relative value,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. US 10-year yields sank 14 basis points, or 0.14 percentage point, to 2.11 percent this week in New York, according to Bloomberg Bond Trader data. They touched 2.10 percent, the least since Dec. 127. The price of the 2.25 percent securities due November 2024 gained 1 7/32, or $12.19 per $1,000 face amount, to 101 7/32.
Thirty-year bond yields dropped 13 basis points to 2.69 percent and touched 2.68 percent, the least since December 16.
Treasuries gained 6.2 percent in 2014, according to the Bloomberg US Treasury Bond Index, buoyed by a global slowdown and low inflation, after losing 3.4 percent the previous year.
The yield curve flattened to 202 basis points yesterday after touching 201 basis points on December 23. Shorter-term debt is more sensitive to Fed policy, while longer-term securities are more sensitive to inflation.
The 10-year yield dropped six basis points, the most in three weeks, after the Institute for Supply Management’s factory index for December sank to a six-month low of 55.5, from 58.7 in November, data from the Tempe, Arizona-based group showed. Figures greater than 50 indicate growth. A Bloomberg survey projected a reading of 57.5.
“The market was ready for ISM orders to show some weakness, but probably not right out of the gate,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Perhaps the initial backwards step related to lower oil prices and production here in the US is coming sooner than people anticipated.”
Crude oil dropped to the lowest since May 2009, damping the outlook for inflation. Crude reached $52.03 a barrel in New York.
“In the first quarter, there will be a far more serious discussion about where oil is going to end up,” Vogel said. “To the extent there is less demand for lower-priced oil than people thought, then we’re in for another difficult four-to-five months. The back end will stay flatter longer than people would have anticipated.”
FTN, which was the most accurate forecaster of the 10-year note in 2014, is calling for the security’s yield to reach 2.75 percent by the end of this year, versus a 3.01 percent median prediction of 76 firms surveyed by Bloomberg.
Yields may face pressure to rise this month because January “is a point when people put on risk, which in this environment would mean adding risk assets rather than adding significant weight to Treasuries,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There are a lot of potential headwinds facing the global economy, and the fact that we’re a high-yielding currency compared to other major sovereign-bond markets is meaningful and will provide a bit of a cap if we see any significant back-up in rates,” Lyngen said. CRT forecasts the 10-year Treasury yield will rise to 2.55 percent this year. The dollar climbed this week against all 16 major peers, reaching $1.2001 per euro, the strongest since June 2010. Treasuries gained as their relative value versus European peers bolstered demand. The US 10-year note’s yield advantage over Group of Seven peers’ average touched 103 basis points yesterday, the most on a closing basis in eight years, before slipping to 98. The average over the past year is 69 basis points.
German 10-year bund yields slid to a record 0.49 percent yesterday. The spread between German and US 10-year yields was 1.61 percentage points, after reaching 1.67 percentage points on December 24, the widest since June 1999. Draghi, in an interview published yesterday in the German newspaper Handelsblatt, sent his strongest signal yet that the central bank is likely to start large-scale government-bond purchases by saying there’s a risk of deflation in the euro area. Policy makers “have to act against such risk,” even if the risk is limited, Draghi said. The ECB next meets January 22. Sovereign-bond purchases by the ECB and the Bank of Japan are likely to fuel demand for fixed income this year that may exceed issuance by $600bn, more than previously estimated, bolstering bond prices, according to JPMorgan Chase & Co. ECB and BOJ buying will offset the end of a purchase program by the Fed last year, the bank said.
The US unemployment rate fell to 5.7 percent in December, the lowest since June 2008, economists surveyed by Bloomberg forecast before the Labor Department reports the data on January 9. Employers added 240,000 jobs, economists projected.
The Fed has maintained the benchmark interest-rate target in a range of zero to 0.25 percent since 2008 to support the economy. Policy makers have been supported by persistently low inflation. The Fed’s preferred price gauge, a measure tied to personal consumption expenditures, has stayed below the central bank’s 2 percent inflation target for more than 2 1/2 years.
Bloomberg
