U.S. 10-Year Yields at Almost One-Year Low on Ukraine

Treasury 10-year (USGG10YR) note yields traded at almost the lowest level in a year amid speculation on whether turmoil in Ukraine will escalate.

The benchmark debt’s yield pared an increase on concern Russia would use a humanitarian-aid mission to eastern Ukraine as a pretext for armed action in support of pro-Russian separatists there. NATO Secretary General Anders Fogh Rasmussen said there’s a “high probability” Russia could intervene militarily, Reuters reported. The U.S. is scheduled to sell $67 billion in notes and bonds this week.

“There’s a safe-haven bid as a result of the ongoing tensions between Russia and the west over Ukraine,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’ve had ebbs and flows.” Lyngen recommends buying five- and seven-year notes on speculation they’ll outperform other maturities amid the debt sales.

The U.S. 10-year note yield rose less than one basis point, or 0.01 percentage point, to 2.43 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data, after increasing earlier to 2.44 percent. The yield slid to 2.35 percent on Aug. 8, the lowest since June 2013. The price of the 2.5 percent security due in May 2024 declined 2/32, or 63 cents per $1,000 face amount, to 100 5/8.

Five-year (USGG5YR) note yields fell less than one basis point to 1.62 percent after rising earlier to 1.64 percent. They touched 1.53 percent on Aug. 8, the lowest level since May 30.

Volume Drops

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, sank 46 percent to $194 billion, from $356 billion on Aug. 8. The average this year is $326 billion. Daily volume reached $504 billion on Aug. 1, the highest in three months, and fell on Aug. 4 to $197 billion.

A gauge of Treasury-market volatility slipped from a two-month high. Bank of America Merrill Lynch’s MOVE Index (BUSY), which measures price swings in Treasuries based on options, was 60.3 basis points, after climbing on Aug. 8 to 62.5 basis points, the highest since June 5. The 2014 average is 59. The gauge fell Aug. 1 to 52.3, the lowest level since May 2013.

The Bloomberg U.S. Treasury Bond Index climbed 3.8 percent this year through Aug. 8, recouping a 3.4 percent loss from 2013.

“Fear is the overwhelming factor driving investment decisions,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We can’t seem to shake that.”

Ukraine, Mideast

Treasuries gained with German bunds as havens this month after violence grew in Gaza, Ukraine tried to dislodge pro-Russian separatists in the eastern part of the country and the U.S. conducted air strikes against Islamic State fighters in Iraq.

Germany’s 10-year bund yield traded at 1.06 percent after rising earlier to 1.08 percent. It dropped on Aug. 8 to a record 1.023 percent.

The Red Cross said it’s working on getting aid to rebel-held areas of east Ukraine, where government forces have encircled major cities. The U.S., the European Union and NATO warned Russia not to use the mission to send in troops.

The North Atlantic Treaty Organization has said Russian President Vladimir Putin may cloak a Russian military incursion as a humanitarian or peacekeeping effort. There’s no sign Russia is pulling back its forces from close to the Ukrainian border, Reuters cited NATO’s Rasmussen as saying today.

In Iraq, President Fouad Masoum asked the deputy speaker of parliament to try to form a new cabinet and end a three-month political stalemate that’s helped Islamist insurgents seize large swaths of the country. While the U.S. backed Masoum’s designation of Haidar al-Abadi, embattled Prime Minister Nouri al-Maliki rejected the move.

Treasury Auctions

The U.S. will auction $27 billion of three-year notes tomorrow, $24 billion of 10-year debt the next day and $16 billion of 30-year bonds on Aug. 14.

“We are consolidating into important auctions this week that will really show if there is strong demand at these yield levels,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There is a lot of supply coming in the long end. Whether we can hold these yields levels will be answered at the auctions.”

U.S. inflation that’s held in check, even as U.S. economic growth rebounded last quarter, has helped lure investors to fixed-income securities.

Consumer prices rose 2.1 percent in June from a year earlier, the Labor Department said July 22. While the figure matched the highest level since October 2012, it’s less than the average of 2.4 percent for the past decade. Gross domestic produce rose an annualized 4 percent in the second quarter, after contracting 2.1 percent in the first, July 30 data showed.

Hourly Earnings

Wages are helping keep inflation from quickening. U.S. workers were paid an average $24.45 an hour in July, just one cent more than in the previous month, government data show.

Average hourly earnings increased 2 percent from a year earlier, failing to recover from the recession that began in December 2007 and ended in June 2009. The measure climbed as high as 3.6 percent in 2008.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey

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