Treasurys rallied Wednesday, pushing 10-year yields to the lowest level in more than six months, as speculation of increased monetary accommodation in Europe added to pressure on traders betting on higher U.S. interest rates.
The yield gap between Treasury two- and 10-year notes approached the narrowest in 10 months. European Central Bank policy makers said they’re preparing measures against low inflation, and Bank of England Governor Mark Carney signaled U.K. interest rates may not be raised until 2015. Federal Reserve Chair Janet Yellen will speak Thursday after telling Congress last week the U.S. economy still needs support.
“The move is all about the central banks and shorts being squeezed,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That continues to give the bond market strength.”
The U.S 10-year yield fell six basis points, or 0.06 percentage point, to 2.55 percent at 4:21 p.m. in New York, according to Bloomberg Bond Trader prices. It reached 2.52 percent, the lowest level since Oct. 31. The price of the 2.5 percent security maturing in May 2024 increased 18/32, or $5.63 per $1,000 face amount, to 99 19/32.
Thirty-year bond yields dropped seven basis points to 3.37 percent, and yields on two-year notes declined two basis points to 0.36 percent.
The yield difference between two- and 10-year notes, or yield curve, shrank for a second day. The spread decreased as much as six basis points to 217 basis points, after contracting on May 2 to 214 basis points, the least since July 5. A flattening yield curve usually means investors are betting on slower economic growth.
Hedge-fund managers and other large speculators are betting against Treasuries due in 10 years and less amid betting on when the Fed will raise interest rates from virtually zero. Speculators increased their net-short position in 10-year note futures, or wagers the securities will decline, by 13 percent in the week ended May 6, according to U.S. Commodity Futures Trading Commission data. Net-short bets on five-year note futures rose 7 percent.
Pacific Investment Management Co.’s Bill Gross said he’s sticking to the front end of the yield curve, buying securities due in five to seven years. Gross, chief investment officer of the world’s biggest bond fund, spoke with Erik Schatzker and Olivia Sterns on Bloomberg Television’s Market Makers.
Pimco, based in Newport Beach, California, maintains the economy is entering a “new neutral” era that will be marked by global growth at lower speeds and interest rates stuck below their levels before the financial crisis.
Yellen is due to speak Thursday to the U.S. Chamber of Commerce after reiterating last week that the Fed’s benchmark interest-rate target will stay near zero for a “considerable time” after the end of a bond-purchase program intended to spur growth. She told U.S. lawmakers that while data show “solid growth” in the second quarter, “many Americans who want a job are still unemployed” and inflation remains low.
The Fed cut monthly bond purchases by $10 billion at each of the past four policy meetings, from $85 billion last year, and has said reductions will continue in “measured steps” as the economy improves.
Policy makers have kept the key rate target in a range of zero to 0.25 percent since 2008.
Futures prices put the likelihood the Fed will start raising the rate by its June 2015 policy meeting at 44 percent, based on trading on the CME Group Inc.’s exchange. The chance of a boost by the October 2015 meeting was 89 percent.
German and French 10-year yields fell to the lowest levels in a year after ECB Executive Board member Peter Praet told Germany’s Die Zeit newspaper the central bank is preparing a range of policy measures to boost growth. Ten-year bund yields fell to as low as 1.37 percent, and 10-year French yields touched 1.81 percent.
The ECB is working “at high speed” on policy instruments, Executive Board member Yves Mersch said. While the purchase of government bonds by the central bank in the primary market is prohibited by treaty, “our mandate nevertheless includes the possibility of buying” in the secondary market if necessary, Mersch said in a speech in Berlin.
While there’s no agreement yet, Germany’s central bank would support action if it’s needed, Bundesbank President Jens Weidmann said in a speech in Berlin.
“Central banks easing and an uncertainty about global growth have given the bond market a boost, and send the message that incredible easy monetary policy globally is set to continue,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.
The Bank of England’s Carney is battling rate-increase expectations as Britain’s recovery gathers pace. While he said the nation is moving closer to a point where it will need tighter policy, the inflation outlook and risks to recovery weigh against an immediate move. The key rate is 0.5 percent. Carney spoke to reporters as he presented economic forecasts.
U.S. Treasury yields extended declines even after the Labor Department reported that wholesale prices in the U.S. climbed the most last month since September 2012, with a 0.6 percent increase in the producer price index. The forecast was for a gain of 0.2 percent from 0.5 percent the previous month, economists in a Bloomberg survey forecast before the report.
The consumer-price index increased 2 percent in April from a year earlier, versus 1.5 percent in March, according to the median forecast of economists in a Bloomberg survey before a Labor Department report tomorrow. The gauge hasn’t risen past 2 percent since October 2012. Slower inflation helps preserve the value of the fixed payments from bonds.
“There’s a perception in the market, which we don’t necessarily agree with, that the economic recovery remains patchy and inflation will stay low, and that’s weighing on Treasury yields,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London.
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