Treasuries fell for the first time in three days, with benchmark 10-year yields rising from a seven-week low, as haven demand ebbed a day after a Malaysian airliner was shot down over Ukraine.
U.S. bonds pared this week’s gains after surging yesterday when the flight from Amsterdam to Kuala Lumpur was downed by a missile and as Israeli troops moved into Gaza. President Barack Obama called for an immediate cease fire in Ukraine. An index of leading indicators for June showed a fifth month of expansion, while a private survey this month showed flagging consumer sentiment.
“The market is digesting what the geopolitical concerns mean for the economy,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “When you get these geopolitical concerns, economic data gets pushed to the side.”
The benchmark 10-year yield rose four basis points, or 0.04 percentage point, to 2.48 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.5 percent note due in May 2024 fell 10/32, or $3.13 per $1,000 face amount, to 100 5/32. The yield dropped to 2.44 percent yesterday, the lowest level since May 29. The yield dropped four basis points on the week.
The five-year yield increased five basis points to 1.67 percent, after dropping seven basis points yesterday.
Hedge-fund managers and other large speculators reduced bets on a decline in 10-year notes in the week ending July 15, according to U.S. Commodity Futures Trading Commission data. Speculative net-short positions, or bets prices will fall, dropped to 53,626 contracts, from 97,772 the week before.
Speculators reversed positions in futures on Treasury (USGG2YR) bonds to a 25,732 net-long position, compared with a net short of 4,357 contracts the week before, CFTC data show.
The U.S. 10-year yield has declined three basis points this week, after dropping 12 basis points in the previous five days. Treasuries have gained 3.6 percent this year, the Bloomberg World Bond Indexes (BUSY) show. The Bloomberg Global Developed Sovereign Bond Index (BGSV) has returned 5 percent this year.
Obama said the missile that downed the Malaysian plane was fired from an area in Ukraine controlled by Russian-backed separatists. Speaking at the White House, Obama also said he supports Israel’s military efforts in the Gaza strip.
“Many, many bad investment decisions are made on these events,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Are these events going to slow the world economy or the U.S. economy? I don’t think so.”
The spread between the rate to exchange floating for fixed interest payments and Treasury yields for two years narrowed after reaching its widest in 11 months yesterday as tensions over the Ukraine increased perceived risk in the financial markets.
The difference between the two-year swap rate and the similar maturity Treasury note yield, known as the swap spread, narrowed to 19 basis points after widening to as much as 20.38 basis points yesterday, the widest since Aug. 23, 2013. It reached a low this year of 8.94 basis points on April 23. The measure is a gauge of investor perceptions of credit risk and is based on expectations for the London interbank offered rate, or Libor.
The Conference Board said its gauge of leading indicators, a measure of the outlook for the next three to six months, rose 0.3 percent, down from a 0.5 percent gain in May. The Thomson Reuters/University of Michigan’s preliminary sentiment index fell to 81.3 from 82.5 in June.
The difference between U.S. five- and 30-year yields shrank to 162 basis points, the least since February 2009, after Fed Chair Janet Yellen told lawmakers this week that while monetary stimulus is still needed, increases in interest rates may occur sooner if the economy accelerates.
Traders see about a 59 percent chance the Fed will increase its key rate by July 2015, federal funds futures contracts show. The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25 percent since December 2008.
The 10-year term premium, a measure of the extra yield investors are demanding to hold longer-term securities, dropped to 0.51 percentage points yesterday, the lowest level since May 2013, according to Fed data. The level is down from a 2014 high of 1.6 percentage points in January and suggests investors are demanding less compensation when buying the securities.