Treasuries rallied, sending benchmark 10-year note yields to the lowest level in more than a year, as investors sought a haven amid turmoil in the Middle East and Ukraine.
Thirty-year bond yields dropped the most in a week since the five days ended July 11 as President Barack Obama authorized airstrikes against militants in Iraq. International strife overshadowed data that showed stronger-than-forecast gains in U.S. service businesses and factory orders. The U.S. will auction $67 billion in notes and bonds next week.
“The geopolitical environment has really overwhelmed everything else,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “These problems are impossible to gauge and present tremendous uncertainty in the market that is likely to be here for some time, and that has sent investors looking for safety.”
Treasury 10-year yields dropped seven basis points, or 0.07 percentage point, to 2.42 percent this week in New York, according to Bloomberg Bond Trader prices. It was the biggest weekly decline since July 11. Yields touched 2.35 percent yesterday, the lowest level since June 20, 2013. The 2.5 percent note due in May 2024 climbed 5/8, or $6.25 per $1,000 face amount, to 100 22/32.
Treasury 30-year bond yields fell five basis points to 3.23 percent. They reached 3.18 percent yesterday, the least since June 6, 2013.
“People are hiding in Treasuries,” Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Federal Reserve, said yesterday. “It’s a huge flight to quality. There’s a lot of confusion in the world.”
Government bonds rose around the world yesterday as investors sought the safest assets. German (GDBR10) 10-year bund yields dropped as much as four basis points to a record-low 1.023 percent, and Australia’s 10-year yield declined as much as 14 basis points to 3.28 percent, the lowest since June 2013.
A record $7.1 billion was pulled from funds that buy U.S. junk bonds in the week ended Aug. 6, accelerating a flight that started last month and bringing net outflows to $9.75 billion this year, according to data provider Lipper.
Sovereign bonds pared advances yesterday amid signals that Russia was trying to de-escalate tension in Ukraine. RIA Novosti said Russia is ready to mediate between Ukraine and rebels who are battling government troops in the east of the country.
The North Atlantic Treaty Organization warned earlier in the week that Russian troops might cross the border with Ukraine to support separatists in the east of the country. Russia banned an array of food goods from the U.S., Canada, Australia (GACGB10) and Europe, striking back at U.S. and European Union sanctions for its support of rebel forces in Ukraine. Russia says it isn’t a party to the conflict in Ukraine.
U.S. government debt rallied this week even as economic data strengthened. The Institute for Supply Management’s non-manufacturing index, which covers an array of industries that make up almost 90 percent of the economy, rose to 58.7 in July, the highest since December 2005, from the prior month’s 56. A Bloomberg survey forecast a gain to 56.5. A reading greater than 50 signifies expansion. U.S. factory orders rose 1.1 percent in June, versus a Bloomberg forecast for a 0.6 percent gain.
The four-week average of first-time claims for U.S. unemployment benefits dropped to 293,500, the lowest since February 2006, Labor Department data showed.
“We’ve had strong economic growth, and it hasn’t mattered,” Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp., said on Aug. 7. “The geopolitical story dominates everything.”
Treasuries were supported as U.S. yields that are higher than those of other government bonds lured buyers. The premium that benchmark U.S. 10-year notes offer over Group of Seven counterparts was 70 basis points, versus a 49 basis-point average over the past year. It reached 78 basis points on July 31, the most since 2007.
Credit Suisse Group AG, a primary dealer, moved its forecast for when 10-year yields will trade at 3.75 percent to late next year. Low global rates relative to the U.S. are having a damping effect on Treasury yields, Credit Suisse’s Carl Lantz in New York and Helen Haworth in London wrote in a client note Aug. 7. The firm had forecast the level would be reached by mid-2015.
“Though the evolution of the macro backdrop has become increasingly supportive to higher U.S. yields, low rates elsewhere have made the U.S. appear increasingly attractive on a relative basis,” Lantz and Haworth wrote.
The extra yield investors earn on U.S. 10-year notes versus comparable German bunds was 137 basis points. It touched 140 basis points on July 31, the most in 15 years based on closing prices.
The Treasury will sell $27 billion of three-year notes on Aug. 12, $24 billion of 10-year debt the next day and $16 billion of 30-year (USGG30YR) bonds on Aug. 14.
Obama said he authorized airstrikes against militants in Iraq if they threatened U.S. personnel. He spoke Aug. 7 at the White House. Two fighter jets attacked an artillery position yesterday used by the militants against Kurdish forces defending Erbil, where U.S. diplomats and some military personnel are based, a Pentagon spokesman said in a statement.
Israeli aircraft bombed Gaza yesterday in response to rocket fire by Palestinian militants after a three-day cease-fire expired.