Treasuries Gain Most in a Month Since January on Europe

Treasury 10-year notes rose in the biggest monthly gain since January as conflict in Ukraine and speculation the European Central Bank will add monetary stimulus boosted demand for the safest assets.

The benchmark note yields were little changed today at almost a 14-month low after data showed U.S. consumer spending fell in July while consumer confidence rose this month. Even as the Federal Reserve scales back its bond-purchase program and debates an interest-rate increase next year, Treasuries are drawing buyers as yields in Europe fall to records amid bets the ECB will take further action to spur a slumping economy.

“It’s the perfect storm,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the U.S. central bank. There are “elevated geopolitical risks. You have Europe showing no growth and disinflation, and the combination of those things is favorable to the bond market.”

The U.S. 10-year note yielded 2.34 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.32 percent after falling on Aug. 15 to as low as 2.30 percent, the least since June 2013. The price of the 2.375 percent securities due in August 2024 slipped 2/32, or 63 cents per $1,000 face amount, to 100 9/32.

Ten-year yields dropped 21 basis points this month, or 0.21 percentage point, the most since January’s decline of 38 basis points. Ten-year securities have returned 2.2 percent in August, the biggest advance since a 3.2 percent gain in January, according to Bank of America Merrill Lynch index data.

Net Longs

Hedge-fund managers and other large speculators were bullish on 10-year note futures for the first time in a year, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will increase, outnumbered short positions by 7,940 contracts on the Chicago Board of Trade as of Aug. 26. A week earlier, net-short positions, or bets on declines, totaled 43,534 contracts.

Thirty-year (USGG30YR) bond yields were little changed at 3.08 percent after reaching 3.0585 percent. They touched 3.0578 percent yesterday, the lowest since May 2013. They decreased eight basis points this week and fell in August for a second month, sinking 24 basis points.

“We’re at 2014 lows,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “A lot of portfolio managers are quite content to sit on their gains at this time of the month.”

The bond market will be closed Sept. 1 for the U.S. Labor Day holiday, according to a recommendation from the Securities Industry and Financial Markets Association Association.

ECB Meeting

Euro-area bond yields have tumbled to records since ECB President Mario Draghi said in Jackson Hole, Wyoming, last week that policy makers will use “all the available instruments needed to ensure price stability” and are “ready to adjust our policy stance further.” The ECB meets on Sept. 4.

German (GDBR10) 10-year yields dropped to 0.866 percent yesterday and France’s slid to 1.217 percent, both all-time lows.

A report today showed annual inflation in the 18-nation euro region slowed in August to 0.3 percent, while unemployment remained close to a record high.

Pro-Russian separatists in eastern Ukraine battled government forces on two fronts as NATO reported a surge of Russian troops and equipment into the war zone. Russian Foreign Minister Sergei Lavrov called satellite photos that NATO said show Russian troop movements fakes. The U.S. and European powers are threatening Russia with further sanctions.

‘Geopolitical Issues’

“The geopolitical issues and Europe helped the market out,” said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York. “It’s worth buying the long end. I’m hesitant of shorter maturities as we progress toward the Fed rate hike and expectations for rates to go higher.”

The U.S. central bank has reduced its monthly purchases of government and mortgage debt to $25 billion, from $85 billion last year, and is on course to end the program this year.

Traders see a 70 percent chance the central bank will raise the benchmark interest-rate target to at least 0.5 percent by September 2015, about the same as a week ago, futures trading showed. The target has been held in a range of zero to 0.25 percent since 2008 to support the economy.

The difference between yields on U.S. five- and 30-year debt touched 142 basis points yesterday, the least since January 2009. It widened today to 145 basis points. The average over the past year is 201 basis points.

U.S. household purchases decreased 0.1 percent after increasing 0.4 percent in June, Commerce Department figures showed today in Washington. Prices tied to consumer spending, the Fed’s preferred gauge of inflation, rose 1.6 percent in the year ended July, the same as in the prior month. The central bank’s target for price increases of 2 percent a year.

The Thomson Reuters/University of Michigan final consumer sentiment index rose to 82.5 from 81.8 in July.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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