Investors Pile Into Treasury Bonds on Growth Concerns

By Dow Jones Business News, 

By Min Zeng

Investors piled into U.S. Treasury bonds on Friday as the latest economic reports out of Germany and the U.S. raised concerns over the pace of global economic growth.

The buying sent the benchmark 10-year note's yield toward the lowest point of the year. The yield on the 30-year bond fell to near a 13-month low.

In late afternoon trading, the benchmark 10-year note was 11/32 higher, yielding 2.469%, according to Tradeweb. The 30-year bond was 1 1/32 higher, yielding 3.244%.

Bond yields fall as their prices rise.

The 10-year note's yield fell from 2.485% at the end of last week. The yield was 3% at the start of January.

A closely watched gauge of business sentiment in Germany, the euro zone's biggest economy, dropped for a third straight month amid tensions between Ukraine and Russia. Geopolitical concerns have risen following last week's downing of a Malaysia Airlines jetliner in Ukraine, which has sparked a selloff in stocks and bonds in Russia.

Meanwhile, in the U.S., demand for durable goods rose by a bigger-than-forecast 0.7% in June. But orders fell 1% in May, revised from an earlier estimate of a 0.9% decline. Core capital goods shipments, a factor economists tracks to predict the economic growth for the second quarter, fell 1.0% in June.

Economists from several big banks including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley cut their expectations for the U.S. economic growth during the second quarter following the release. The International Monetary Fund earlier this week expected the U.S. economy to grow at 1.7% for 2014, down from 2% previously forecast.

"Global growth [is] still unclear," and investors want to "play it safe" ahead of the weekend, said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. "The conflict between Ukraine and Russia puts more pressure on European growth due to the sanctions and the European need for Russian oil."

Mr. Milstein said the 10-year Treasury note's yield could fall to as low as 2.25% if it breaks below 2.4%--which marks the intraday low of 2014 made during the May 29's session.

The German data boosted speculation that the European Central Bank may add more monetary stimulus in coming months to support the economy. The prospect of further monetary stimulus encouraged investors to buy government bonds in the euro zone, sending bond yields lower broadly.

Friday, the 10-year German government bond's yield fell to 1.147%. The yield on Spain's 10-year government bond fell to 2.548% and the yield on Italy's 10-year government bond declined to 2.722%.

U.S. Treasury bonds offer superior yields compared with their counterparts in Germany, attracting buyers seeking relative value. This has been one of the main factors pushing down Treasury yields this year.

"Concern over the trajectory of global growth, ongoing global geopolitical turmoil, and U.S. yields being substantially higher than its global counterparts," which all contributed to the rally in Treasury bonds, said Mary Ann Hurley, vice president of trading in Seattle at D.A. Davidson & Co.

Analysts and traders said uneven global growth continues to support the Federal Reserve's stance of being patient in raising official interest rates. Economists widely expect the Fed won't start hiking the policy rate--the fed-funds rate--until the middle of next year.

The Fed's next policy meeting is scheduled next week. Economists expect the Fed to announce further reduction in its monthly bond buying but would continue to keep interest rates near zero.

Interest rate strategists at Goldman Sachs, Morgan Stanley and JPMorgan still expect the 10-year Treasury note's yield to rise to 3% at the end of the year. They believe the U.S. growth would gain traction and demand for haven bonds will diminish.

Ms. Hurley says that the 10-year yield could stay below 3% this year "unless the economy has a sharp growth acceleration."

   1/2%    2-year 100         flat     0.492%     flat
   7/8%    3-year 99 23/32    up 1/32  0.974%     -1.3BP
   1 5/8%  5-year 99 24/32    up 3/32  1.676%     -2.4BP
   2 1/8%  7-year 99 30/32    up 7/32  2.132%     -3.4BP
   2 1/2% 10-year 100 8/23    up 11/32 2.469%     -4.0BP
   3 3/8% 30-year 102 15/32   UP 1 1/32 3.244%    -5.5BP

2-10-Yr Yield Spread: +197.7BPS Vs +201.5BPS

Source: Tradeweb

-- Write to Min Zeng at -0- - -

  (END) Dow Jones Newswires
  Copyright (c) 2014 Dow Jones & Company, Inc.

This article appears in: Bonds , Economy , Real Estate

Referenced Stocks: MS

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