Treasury Bonds Log Biggest Monthly Rally Since January

By Dow Jones Business News, 

By Min Zeng

U.S. Treasury bonds on Friday logged the biggest monthly rally since January, in the latest sign of strong demand for ultrasafe bonds.

The benchmark 10-year note settled 4/32 lower Friday, as investors booked profits at month's end, with the yield at 2.347%. That was above the 2.334% on Thursday, which was the lowest closing yield since June 2013.

For the month, the yield dropped about 0.21 percentage points, extending this year's decline from about 3% at the start of January. Yields fall as prices rise.

"The overall bid for global fixed income, whether on the back of weaker euro-zone data, a dovish European Central Bank or geopolitical concerns, are boosting Treasurys," said Stanley Sun, interest-rates strategist at Nomura Securities International in New York. U.S. bonds are "attractive" compared with lower-yielding German sovereign bonds.

The yield on the 10-year German government bond settled Friday at 0.887%, according to Tradeweb. The yield was down about 0.29 percentage points in August amid growing expectations the ECB would roll out fresh monetary stimulus, probably a bond-buying program, in the coming months.

Lower yields in the U.S. and Germany, together long perceived as the world's core bond markets, have rippled through broader credit markets. Many riskier bonds performed even better than Treasury bonds in August, a sign investors starving in a low-yield world dialed up their risk spectrum in exchange for higher income.

Corporate bonds sold by lower-rated U.S. firms, known as junk bonds, posted a total return of 1.56% in August through Thursday, U.S. investment-grade corporate bonds returned 1.49% and U.S. municipal bonds returned 1.15%, according to data from Barclays PLC.

All the returns outpaced the gain of 1.06% from the overall U.S. Treasury debt market. Returns include price appreciation and interest payments.

"At some point, the acceptance of additional risk for a higher return seems mandatory," said Kevin Giddis, head of fixed income at Raymond James in Memphis, Tenn. "Global events have forced the safe-haven trade, and its continuation has forced investors to reach for yield."

Eric Stein, co-head of the global income team at Eaton Vance Management, which oversees $12.8 billion in assets, said "a stronger U.S. economy should be good for those riskier bonds" even if concerns over their valuation have risen.

U.S. junk bond funds and exchanged-traded funds have attracted $3.575 billion new cash over the past three weeks, following a record $7.1 billion outflow for the week that ended on Aug. 6, according to Jeff Tjornehoj, head of Lipper Americas Research.

More broadly, U.S. taxable bond funds and ETFs have drawn $8.6 billion net inflow in August through the 27th, bringing the year-to-date inflow to $64.3 billion, according to Lipper.

U.S. financial markets will be shut Monday for the Labor Day holiday. Bond investors face two key event risks next week: The ECB is set to meet to set interest0rate policy on Sept. 4, followed by the release of the U.S. nonfarm employment report on Sept. 5.

Analysts and traders say bond yields could rise if the ECB disappoints investors, who are expecting the central bank to take action.

"Expectations certainly are mounting for the ECB to come with some bond-buying program fairly soon, but it may not be announced next week," said Anthony Cronin, a Treasury bond trader at Société Générale SA.

Mr. Cronin added that "this anticipation could keep a cap on Treasury yields for the next few months in anticipation of the [ECB] eventually announcing a large-scale asset purchase."

A strong U.S. jobs report could also send bond yields higher as it may raise anxiety over whether the Federal Reserve may raise official interest rates sooner than expected, said analysts and traders.

   1/2%    2-year 100         up 1/32  0.492%     -1.2BP
   7/8%    3-year 99 27/32    up 1/32  0.929%     -1.0BP
   1 5/8%  5-year 99 31/32    up 1/32  1.627%     -0.5BP
   2%      7-year 99 22/32    dn 1/32  2.046%     +0.7BP
   2 3/8% 10-year 100 8/32    dn 4/32  2.347%     +1.3BP
   3 1/8% 30-year 100 22/32   dn 11/32 3.089%     +1.8BP

2-10-Yr Yield Spread: +185.5BPS Vs +184.5BPS

Source: Tradeweb/WSJ Market Data Group

--Write to Min Zeng at -0-

  (END) Dow Jones Newswires
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This article appears in: US Markets , Bonds , Economy , Real Estate

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