Treasurys erased losses, pushing yields down from the highest in three weeks, as investors continued to seek safety in U.S. government securities amid skepticism about efforts to resolve the conflict in Ukraine.
The benchmark 10-year note yield was little changed after Ukrainian Prime Minister Arseniy Yatsenyuk said Russia has ignored or “cheekily violated” all previous agreements. The Ukraine crisis and the prospect of the European Central Bank adopting further stimulus have capped bond yields even as the economic outlook in the U.S. brightened.
“You just can’t keep a good market down,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Federal Reserve. “It’s not enough to say the flight to quality is over. It’s a global move in rates to lower yields and U.S. yields look great relative to global rates. It’s the ‘buy the dip’ mentality.”
U.S. 10-year notes yielded 2.41 percent at 2:51 p.m. in New York, according to Bloomberg Bond Trader data. The 2.375 percent note maturing in August 2024 cost 99 22/32. The yield reached 2.47 percent earlier, the highest since Aug. 13.
Edmonds said the the best place to be is “the seven- or 10-year sector. The demand has been out the curve, intermediates or longer.”
“This is just another ‘plan’ aimed at window-dressing for the international community ahead of the NATO summit and an attempt to avoid the inevitable decisions by the European Union to impose a new wave of sanctions against Russia,” Yatsenyuk said in an e-mailed statement about Russian President Vladimir Putin’s proposed peace plan for the five-month conflict.
Putin called for an end to the rebels’ offensive in the country’s easternmost regions and urged the withdrawal of the Ukrainian military from residential areas as part of a seven- point proposal he presented today in Ulaanbaatar, Mongolia. A final agreement may be reached at a Sept. 5 meeting, he said.
U.S. President Barack Obama arrived in Tallinn, Estonia, where he is expected to meet with the leaders of Estonia, Latvia and Lithuania before heading to this week’s North Atlantic Treaty Organization summit in the U.K.
“Since the initial selling on the good news, you’ve had some information about the cease-fire,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “There’s nothing set in stone, and people are questioning the true motivations of Putin in that regard.”
Demand for the relative safety of Treasurys has increased in recent months as the conflict in Ukraine intensified, the U.S. bombed Islamic State positions in Iraq and Israel bombarded Gaza before agreeing to a truce.
The headlines on Ukraine and Russia “will continue to be more of an impactful force than the economic data,” said Thomas Simons, a government-debt economist in New York at primary dealer Jefferies LLC.
U.S. government bonds returned 1.3 percent in August, the most since January, according to Bloomberg World Bond Indexes.
In Europe, bond yields are at almost record lows after ECB President Mario Draghi said last month inflation expectations have deteriorated across the euro area and signaled policy makers are ready to do more to boost prices.
German 10-year yields fell to an all-time low 0.866 percent last week and France’s declined to 1.217 percent. ECB policy makers are scheduled to decide on monetary policy tomorrow.
U.S. 10-year yields climbed eight basis points yesterday, the biggest increase since July 30, after the Institute for Supply Management’s factory index unexpectedly rose to the highest level since March 2011. Treasurys were supported earlier today as a report showed factory orders in July rose 10.5 percent, lower than the median forecast for 11 percent in a Bloomberg News survey.
The U.S. economy kept growing in July and August, with consumer spending in most places growing at a “slight to moderate” pace, according to the Fed’s Beige Book survey of the economy. A report on Sept. 5 may show employers added more than 200,000 jobs for a seventh month in August.
The Fed has reduced its monthly purchases of government and mortgage debt to $25 billion from $85 billion, and is on course to end the program this year. It next meets Sept. 16-17.
“We’re going to see higher rates at some point,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It’ll be based on how the Fed interprets the move in the economy. If I were an investor, I probably would not be sitting in the back end of the market thinking we’re going to see lower rates.”
Analysts forecast 10-year Treasury rates will climb to 2.92 percent by Dec. 31, based on a Bloomberg survey of banks and securities companies with the most recent predictions given the heaviest weightings. That’s the lowest since July 2013 and down from a high this year of 3.43 percent on July 15.
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