Treasury 30-year bonds rose, with yields falling to the lowest level since June, as speculation of increased monetary accommodation in Europe added to pressure on traders betting on higher U.S. interest rates.
The long bond advanced in the biggest three-day rally in eight months as Italian, Spanish and Irish bonds slid amid data showing the euro-area recovery failed to gather momentum last quarter. Treasuries gained even after U.S. consumer prices rose and jobless-benefit claims fell. Traders cut bets the Federal Reserve will raise interest rates by mid-2015. Stocks sank.
“We are seeing the last vestiges of panic buying by investors who delayed their purchases because they expected yields to go up,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “The rally has been surprising and impressive, breaking significant levels easily, with nothing to stop it.”
Thirty-year bond yields dropped five basis points, or 0.05 percentage point, to 3.33 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 3.30 percent, the lowest level since June 17, and have declined 17 basis points over the past three days, the most since August. The price of the 3.375 percent securities due in May 2044 gained 31/32, or $9.69 per $1,000 face amount, to 100 30/32.
The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, increased for a third day, rising 26 percent to $500 billion. It was the highest level since May 2’s $606 billion, which was the most in 2014. The daily average this year is $342 billion.
“This is the pain trade,” said Andrew Brenner, the head of international fixed income at National Alliance Capital Markets in New York. “This has everything to do with bad positions. The amount of liquidity in the market has been reduced dramatically, and all the people going in the same direction have exaggerated the moves.”
The difference between yields on two- and 10-year notes, called the yield curve, shrank for a third day and touched 212 basis points, the least since July 3. A flattening yield curve usually means investors are betting on slower economic growth.
The Standard & Poor’s 500 Index dropped 0.9 percent.
The euro region grew 0.2 percent in the last quarter, half as much as economists had forecast, data showed today. Separate reports showed French growth unexpectedly stalled and economies from Italy to the Netherlands shrank. That put pressure on the European Central Bank to delivery stimulus measures next month.
Ten-year Italian bond yields climbed to as high as 3.14 percent after dropping earlier to a record 2.89 percent. Irish and Spanish securities also reversed gains that had pushed yields to the least since Bloomberg began collecting the data.
“Europe is looking to pull out a round of stimulus,” said Brian Edmonds, head of interest-rates trading in New York at the primary dealer Cantor Fitzgerald LP. “Anyone who sat hoping for higher rates, as time goes by they are forced to come in.”
European Central Bank President Vitor Constancio said policy makers are prepared to add further monetary stimulus if needed. Bank of England Governor Mark Carney signaled yesterday that U.K. interest rates may not be raised until 2015.
Fed Chair Janet Yellen told Congress last week that even after adding 288,000 jobs in April, the U.S. economy still needs support. Yellen reiterated that the Fed’s benchmark interest-rate target will stay near zero for a “considerable time” after the end of a bond-purchase program to spur growth.
“Central banks are still easing, and there are still a lot of shorts who were caught on the wrong side of the trade,” said Scott Graham, head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, a primary dealer. Shorts are bets a security’s price will fall.
Hedge-fund managers and other large speculators had bet against Treasuries due in 10 years and less amid speculation on when the Fed will raise interest rates. Speculators increased their net-short position in 10-year note futures 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.
“All of a sudden, the U.S. looks like good value,” said William Larkin, a money manager who oversees $520 million in assets at Cabot Money Management in Salem, Massachusetts. “This is the exact opposite of what everybody thought -- with the improvement in employment and the Fed tapering, this is counter-logic.”
Futures prices today put the likelihood the Fed will start raising its benchmark interest rate by its June 2015 policy meeting at 42 percent, down from 51 percent a month ago, based on trading on the CME Group Inc.’s exchange.
Thirty-year bonds returned 13 percent this year through yesterday after losing 15 percent in 2013, according to Bank of America Merrill Lynch bond indexes. Ten-year notes have gained 5.5 percent, versus a 7.8 percent loss last year.
Most macro hedge-fund managers missed the biggest trade this year -- buying long-term U.S. Treasuries -- and now there’s an opportunity to bet against the debt, said Michael Novogratz, principal at Fortress Investment Group LLC.
“There’s only one great trade in macro this year we missed, most macro missed -- buying duration in the Treasury market,” Novogratz said at the SkyBridge Alternatives Conference in Las Vegas. “Yields are getting to an area where being long doesn’t make sense and having a sizable short makes sense.”
The long-bond yield will rise to 4.04 percent by year-end, according to the weighted average forecast of analysts surveyed by Bloomberg. The 10-year note will yield 3.23 percent.
Treasuries remained higher as a Fed report showed that U.S. industrial production unexpectedly fell in April, declining 0.6 percent. The U.S. consumer-price index rose 2 percent in April from a year earlier, as forecast in a Bloomberg survey. Initial claims for jobless benefits fell to 297,000 last week, from 321,000 the previous week.
Steve Kuhn, fixed-income trading head at $14.8 billion Pine River Capital Management LP, said investors should sell their bonds and buy “boring” stocks including packaging manufacturer Rock-Tenn Co.
“This is a great time to replace Treasury holdings with these boring stocks,” he said at the SkyBridge Alternatives Conference.