Ten-Year Treasury Yield Closes at 2014 Low

By Dow Jones Business News, 

By Min Zeng

Investors piled into safer government bonds in the U.S., Germany and the U.K. on Thursday as growing geopolitical tensions in Ukraine dent appetites for riskier assets.

Higher prices sent bond yields tumbling. The 10-year Treasury yield closed at the lowest level of the year.

The 10-year German government bond's yield hit a record low near 1%. The two-year German government bond yield traded at zero.

"It is flight to safety," said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at the United Nations Federal Credit Union in New York. "It's about the geopolitics now potentially having a larger negative effect on growth globally, especially in Europe."

The benchmark 10-year Treasury note rose by 21/32 in price, yielding 2.424%. It is the lowest closing yield since June 2013.

In Germany, the 10-year government bond's yield fell to 1.070%, according to Tradeweb. The U.K. 10-year government bond yield slid to 2.490%.

Falling bond yields in haven bond markets suggest geopolitical risks in Ukraine, Iraq and Gaza have clouded global economic growth, which has been stuck at an uneven and slow pace following the 2008 financial crisis.

While the U.S. economy has showed signs of gaining traction lately, investors are worried that the economic prospects in Europe could be undercut if geopolitical risks deteriorate.

"At some point, if the broader risk environment doesn't improve, that could weigh on the U.S. economic data, although that point is likely a ways off," said John Bellows, investment management strategy analyst at Western Asset Management Co. which manages more than $400 billion in assets.

European Central Bank President Mario Draghi said Thursday, following a monetary policy meeting, that heightened geopolitical risk could negatively impact the economy.

Data earlier this week showed Italy slipped back into a recession during the second quarter, while factory orders in Germany, the biggest economy in the euro zone, tumbled in June. Germany is a main trading partner with Russia.

The prospect of more stimulus from the ECB to support the economy has sent euro-zone government bond yields lower this year, a main factor dragging down bond yields in the U.S.

"Europe seems to be holding the key for Treasurys recently," said Anthony Cronin, a Treasury bond trader at Société Générale SA. He added that if the 10-year German bond yield keeps falling, then "it is likely that 2.4% will be broken" for the 10-year Treasury yield.

The 10-year Treasury yield touched 2.4% on May 29, the lowest intraday level since June 2013. The yield has tumbled from 3% at the start of the year.

Lower bond yields this year have confounded bond investors and analysts who have predicted that the yield should have continued to climb from 3%.

But the overseas developments have pushed down bond yields, overshadowing upbeat U.S. reports that have pointed to the economy gaining traction from the winter doldrums. Thursday, new applications for unemployment benefits fell last week to this year's second-lowest level, a new sign of an improving labor market.

Jonathan Lewis, chief investment officer at Samson Capital Advisors LLC which has over $7 billion assets under management, said the 10-year note's yield is too low and is not attractive to buy.

Mr. Lewis said the yield should rise in the months ahead, assuming geopolitical tensions ease.

Interest-rate strategists at U.S. big banks including Goldman Sachs Group Inc. still expect the 10-year yield to rise to 3% at the end of the year.

   1/2%    2-year 100 4/32    up 2/32  0.432%     -2.8BP
   7/8%    3-year 100 1/32    up 3/32  0.867%     -3.8BP
   1 5/8%  5-year 100 4/32    up 8/32  1.597%     -5.3BP
   2 1/8%  7-year 101 5/32    up 12/32 2.071%     -5.8BP
   2 1/2% 10-year 100 21/32   up 14/32 2.424%     -5.0BP
   3 3/8% 30-year 101 25/32   up 29/32 3.228%     -4.8BP

2-10-Yr Yield Spread: +199.2BPS Vs +201.8BPS

Source: Tradeweb/WSJ Market Data Group

Write to Min Zeng at min.zeng@wsj.com

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This article appears in: Bonds , Real Estate

Referenced Stocks: GS

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