By Dow Jones Business News,
August 07, 2014, 03:58:00 PM EDT
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
"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
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.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
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 firstname.lastname@example.org
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