Treasuries rallied, with benchmark 10-year note yields falling to the lowest level in more than a year, as turmoil between Ukraine and Russia and weakening economic data in the U.S. fueled investor demand for a haven.
U.S. government bonds rose for a second week as retail sales stalled, jobless-benefit claims rose and consumer confidence fell, spurring bets the Federal Reserve will be slow to raise interest rates. The crisis in Ukraine escalated as the government said its troops destroyed part of a military convoy that crossed into the country from Russia. Central bankers meet next week for an annual conference in Jackson Hole, Wyoming.
“All of these things are favorable and create an underpinning for the market,” Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp., said of the conflict and data. “It’s a full capitulation” by investors who bet against Treasuries.
U.S. 10-year yields dropped eight basis points, or 0.08 percentage point, to 2.34 percent this week in New York, according to Bloomberg Bond Trader prices. It was the biggest weekly decline since July 11. Yields touched 2.30 percent yesterday, the lowest level since June 19, 2013.
Economists reduced the year-end forecast for the benchmark 10-year note yield to below 3 percent for the first time since May 2013. The security will yield 2.92 percent Dec. 31, according to the median estimate of economists surveyed by Bloomberg from Aug. 8-13. The projection was 3.44 percent in January.
Longer-term Treasuries rose this week as bets declined on an increase in the Fed’s benchmark interest-rate target by mid-2015. Traders saw a 34 percent chance the central bank will increase the rate target to at least 0.5 percent by its June meeting, futures contracts indicated. There was a 51 percent likelihood at the end of last month.
The Fed has held the target in a range of zero to 0.25 percent since December 2008 to support the economy.
“The long end is the rich part of the curve already,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “You are reaching nose-bleed levels, so that leaves the five-year as the safer point. In the event the Fed is not as prone to hiking as people expected, the five-year will do very well because it sold off significantly already.”
Central-bank Chair Janet Yellen will give the keynote speech Aug. 22 at the Kansas City Fed’s three-day symposium in Jackson Hole for central bankers and economists. The focus of the event, which begins Aug. 21, is “re-evaluating labor market dynamics.”
Yellen has cited labor-market slack as a reason for keeping rates low even as employment improves. The Fed, in a statement July 30 after a policy meeting, said “a range of labor-market indicators suggests that there remains significant underutilization of labor resources.” Minutes of the meeting will be released Aug. 20.
Treasury auctions of 30- and 10-year securities this week drew above-average demand on speculation uneven economic growth means interest rates will stay low for longer than some anticipated.
Both maturities were priced at the lowest yields in more than a year. The 10-year note attracted 2.83 times more bids than the amount of debt sold, a demand gauge called the bid-to-cover ratio, and the 30-year bond drew 2.6 times more, both above the averages at the previous 10 auctions.
Treasuries gained as the Commerce Department reported Aug. 13 that retail sales stalled in July in the weakest performance in six months. The department reported July 30 that U.S. gross domestic product rose an annualized 4 percent from April through June, the fastest since the third quarter of 2013.
“You’re looking at a pretty sizable letdown following second-quarter growth numbers,” Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, a primary dealer, said after the sales data. “This number suggests we have a lot of ground to make up.”
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to 79.2 this month, the lowest since November, data showed yesterday. Initial claims for jobless benefits rose to 311,000 last week, the highest level in six weeks, Labor Department figures showed Aug. 14.
Ukrainian government troops engaged military vehicles that had arrived overnight from Russia through a rebel-held section of the border, Andriy Lysenko, a spokesman for the country’s military, told reporters in Kiev yesterday.
Ukrainian soldiers continue to come under shelling, including rounds fired from Russia, he said.
The Russian Defense Ministry said no military column from the country crossed into Ukraine, the state-run news service said. Russia had about 275 trucks parked near its western border loaded with what it says is humanitarian aid for rebel-held areas in Ukraine. Officials from Ukraine were sent to join Red Cross representatives in inspecting the cargo.
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