Treasuries rose for the first time in three days as investors seeking a refuge from turmoil in the Ukraine and slower economic growth in Europe ignored a report showing U.S. home purchases climbed the most in six months.
Yields on benchmark 10-year notes declined from almost a one-week high as violence marred preparations for Ukrainian elections on May 25. German business confidence fell more than forecast amid signs that expansion of the euro area’s largest economy will slow this quarter. Treasury yields were at almost the highest level relative to German bunds since 2007.
“No one wants to be short going into a weekend where there is the election in Ukraine and the potential for more violence,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., referring to making bets Treasuries will fall. “Domestically, the economic data continues to be middling, and when you look at Treasuries versus a number of other safe and sovereign assets, Treasuries still offer pretty good value.”
U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 2.53 percent at 2 p.m. New York time, according to Bloomberg Bond Trader data. It was little changed on the week. The price of the 2.5 percent security due in May 2024 rose 5/32, or $1.56 per $1,000 face amount, to 99 23/32.
The yields rose yesterday to a one-week high of 2.57 percent after sliding on May 15 to 2.47 percent, the lowest level since Oct. 30.
Thirty-year (USGG30YR) bond yields dropped three basis points to 3.39 percent, paring a weekly increase to five basis points.
Treasuries closed early at 2 p.m. in New York and will stay shut worldwide on May 26 for Memorial Day in the U.S. and the Spring Bank Holiday in the U.K., according to the Securities Industry and Financial Markets Association.
Investors in exchange-traded funds stepped up their holdings of U.S government debt this month, adding $6.9 billion, according to data compiled by Bloomberg. That’s three times the $2.3 billion they added last month. Investors withdrew $11.6 billion from domestic equity funds, after adding $5.3 billion last month, the data showed.
U.S. government securities are yielding 60 basis points more than German bunds, according to Bank of America Merrill Lynch bond indexes. The spread reached 62 basis points last month, the most since June 2007.
Treasuries remained higher after today a government report showed U.S. sales of new homes increased in April. Purchases rose 6.4 percent to a 433,000 annualized pace, Commerce Department data showed. Economists surveyed by Bloomberg forecast a 10.7 percent gain to 425,000.
“The good data is still being overwhelmed by risk aversion from geopolitical issues, strong demand for Treasuries from foreign buyers on a relative-value basis and the continued short squeeze that is still bringing buyers in,” said Dan Heckman, a senior fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees $120 billion. “Inflation hasn’t been a concern.”
A short squeeze is when traders are forced to buy back a security whose price is rising after they sold it short, betting the price would fall.
The Fed’s target for annual inflation is 2 percent. Its preferred gauge, the personal consumption expenditures index deflator, has remained below the goal for almost two years. The measure increased 1.1 percent in March, the latest figure available, from a year earlier.
The central bank is scaling back the bond-buying program it has used to pump money into the economy amid signs growth is accelerating. It has expanded its balance sheet to more than $4.3 trillion since 2008 in bond purchases designed to lower longer-term borrowing costs, fueling concern the strategy would spur inflation. The Fed also has held the benchmark interest rate at virtually zero since 2008.
Policy makers are watching progress toward their goal of full employment as they consider the timing of the first interest-rate increase since 2006. Minutes released May 21 of the Fed’s April meeting showed officials said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate.
“The bond market has weathered a number of storms this week, but even with that, the 10-year note yield is holding steady,” Kevin Giddis, senior managing director and head of fixed income in Memphis at Raymond James & Associates Inc., said in a note to clients.
Russian President Vladimir Putin sent conflicting messages on Ukraine’s elections. While he said Russia will work with the next Ukrainian president, he also said that, “strictly speaking,” it’s impossible to hold a vote because former President Viktor Yanukovych wasn’t removed from office constitutionally. Yanukovych fled to Russia after mass protests.
A gauge of German business confidence, the Ifo institute’s business climate index, fell to 110.4 in May from 111.2 the prior month. Economists surveyed by Bloomberg predicted a drop to 110.9. Germany is key to the recovery in the 18-nation euro area, which is struggling to pick up pace amid near-record unemployment and subdued pricing power.
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