FYI: Copy & Paste 5/28/14: Cynthia Lin: WSJ
Regards,
Ted
A roaring rally in the prices of U.S. and European government bonds sent yields on Treasurys and other ultrasafe debt to 2014 lows, underscoring continued investor uncertainty over the pace of global economic growth.
In late afternoon trading, the 10-year U.S. Treasury note was up 21/32 in price to yield 2.443%, according to Tradeweb. The yield sank as far as 2.432%, its lowest level since June 2013. Bond yields fall when prices rise.
Demand was equally strong across the Atlantic, amid expectations that the European Central Bank could loosen monetary policy as soon as next week. The yield on 10-year German bunds fell 0.05 percentage point to 1.285%, the lowest since May 2013. The yield on 10-year U.K. gilts fell 0.09 percentage point to 2.549%.
Traders said the rally was driven by a surprise uptick in Germany's unemployment as well as typical month-end buying by fund managers to better align their portfolios with underlying indexes. A Treasury price rally in 2014 that has brought the 10-year yield down from 3% at the end of 2013 has left many fund managers holding smaller positions in U.S. debt than market benchmarks.
"The buying [in U.S. Treasurys] is being driven by relative value, rather than a need for yield," said Jake Lowery, portfolio manager at Voya Investment Management. "Global fixed income looks relatively expensive" compared with U.S. Treasurys.
Mr. Lowery points to the yield difference between U.S. and German 10-year debt. The U.S. offers about 1.15 percentage point in extra yield versus Germany, a historically large premium.
The wave of bond buying is the latest chapter in a yearlong government-bond rally that has surprised many investors and unexpectedly made safe debt one of the strongest-performing asset classes in financial markets.
Wednesday's rally wasn't limited to debt perceived as safest by investors. Yields on bonds issued by economically weaker European nations such as Spain, Italy and Portugal also declined. Spain's 10-year yield fell as far as 2.793%, a record low.
"We've had a rally in some other sovereign debt markets, making Treasurys look cheaper," said Gary Pollack, head of fixed-income trading at Deutsche Bank's private wealth-management u
Wednesday's Treasury gains add to Tuesday's rally in the face of upbeat U.S. economic data and fresh supply hitting the market. The fact that yields hover around the year's lows while U.S. economic data has been improving and growth is widely expected to accelerate has many bond analysts scratching their heads.
"We, who are usually some of the most bullish in the herd, are having a hard time reconciling generally OK data" with falling yields, said David Ader, government bond strategist at CRT Capital Group.
Many analysts point to the heavily skewed net trading position at the start of the year, with many investors betting Treasury prices would fall as the economic recovery picked up pace. Those bets were hit by a U.S. slowdown last quarter, causing many to unwind the so-called shorts.
"The market in general has been caught off guard by the strength in Treasurys this year," Mr. Pollack said, adding that he doesn't see yields sinking much further from here. Like many others, Mr. Pollack sees the 10-year yield ending the year around 3% as U.S. growth accelerates into year-end.
With many sellers crowded around the 2.42% mark on the 10-year note, traders don't see the yield falling significantly past that point without a new round of soft data.
J.P. Morgan's weekly Treasury client survey showed short positions ramping back up to 35% from 24% last week. Neutral positions fell from 66% to 48%, reflecting the fewest fence-sitters since October 2010.
A five-year Treasury auction Wednesday attracted mediocre demand, offering buyers the lowest yield on that maturity in six months. That followed a weak turnout at Tuesday's two-year note sale.
The soft auctions show how there are limits to the seemingly insatiable demand for U.S. Treasurys. While investors question the outlook on global growth, data at home have been improving, which raises worries among bond investors about the Federal Reserve increasing rates.
Fed officials, including Atlanta Fed President Dennis Lockhart overnight, have assured that rates will remain low for some time to come to support the economy. But should growth accelerate and inflation perk up, the rally in bonds now only sets up risks for a bigger selloff later on.
Rate-increase expectations for now are centered around mid-to-late 2015.
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