Treasuries rose, with 10-year yields dropping to the least in 12 weeks, as a slowdown at Chinese factories and emerging-market losses from the Federal Reserve’s cuts in bond purchases drove demand for the safest assets.
U.S. debt rallied as a government report showed the Fed’s preferred gauge of inflation was up 1.1 percent in December from a year earlier, below the central bank’s 2 percent target for a 20th month. The 0.39 percentage point drop in 10-year yields in January is the most since August 2011 when Standard & Poor’s downgraded the U.S. credit rating to AA+, prompting the stock market to plunge and investors to seek a haven in Treasuries.
“The overarching theme is the risk aversion that’s coming from the emerging-market situation,” said Robert Tipp, chief investment strategist in Newark, New Jersey for Prudential Financial fixed income division, which oversees $397 billion in bonds. The Fed has indicated “this taper’s going to go through regardless of emerging-market volatility and marginally softer data in the U.S.,” Tipp said.
Benchmark 10-year yields fell five basis points, or 0.05 percentage point, to 2.64 percent as of 5 p.m. New York time, Bloomberg Bond Trader data show, touching the lowest since Nov. 8. The 2.75 percent note due in November 2023 rose 14/32, or $4.38 per $1,000 face amount, to 100 29/32.
Treasuries were also boosted by fixed-income funds that manage portfolios against benchmark indexes and typically purchase longer-maturity Treasuries at month-end to align interest-rate sensitivity of their holdings with the indexes. Barclays Plc said via e-mail its U.S. Aggregate Index will extend its duration, the measure of rate-sensitivity, by 0.09 year on Feb. 1 compared with 0.07 year on Jan. 1.
Hedge-fund managers and other large speculators increased their net-long position in 30-year bond futures in the week ending Jan. 28 to the most since January 2005, according to U.S. Commodity Futures Trading Commission data. As recently as Nov. 22, these traders were betting on declines.
Speculative long positions, or bets bond futures prices will increase, outnumbered short positions by 68,533 contracts, up 20 percent from a week earlier.
Speculative net-short positions in 10-year note futures doubled to 117,759 contracts as of Jan. 28.
The Bloomberg U.S. Treasury Bond Index rose 1.6 percent this month through yesterday, set for the steepest gain since May 2012, as emerging-market assets plunged.
The Bank of America Merrill Lynch Global Broad Market Index returned 1.4 percent in January as of Jan. 30, including reinvested interest, the most since December 2011. The gauge, which tracks more than 21,200 securities with a market value exceeding $45 trillion, shows yields are about 1.9 percent on average, down from almost 2.10 percent at the end of December and last year’s high of 2.27 percent in September.
Investors sought safety this month as industry data on China showed manufacturing shrank in January for the first time since July. A Bloomberg customized gauge tracking 20 developing-nation currencies fell 3.2 percent this month to its lowest level since 2009, fueling demand for the relative safety of U.S. debt.
“People started to focus on problems in emerging markets and that started the flight-to-quality bid,” said Donald Ellenberger, who oversees about $10 billion as income assets as head of multi-sector strategies at Federated Investors in Pittsburgh. “We’ve reversed all of the big increase in yields we had in December.”
The Fed announced this week that it will cut its purchases of Treasury and mortgage debt to $65 billion a month starting in February from $75 billion. The move follows a $10 billion reduction in January. The central bank bought $4.5 billion of Treasuries maturing from February 2018 to September 2018 today, according to the Fed Bank of New York’s website.
Traders are pricing in a 12.7 percent probability that the central bank raises its benchmark rate by its January 2015 meeting, down from 17.8 percent on Dec. 27. The Fed has kept its target for overnight loans between banks in a range of zero to 0.25 percent for five years.
Treasuries fell yesterday after a report showed the U.S. economy expanded at a 3.2 percent annual rate in the fourth quarter, matching economists’ forecasts.
The Institute for Supply Management-Chicago Inc.’s barometer decreased to 59.6 this month from 60.8 in December, the group said. The median estimate in a Bloomberg survey of economists of 56 economists surveyed by Bloomberg called for a decline to 59. Readings greater than 50 signal growth.
The Thomson Reuters/University of Michigan final January index of consumer sentiment fell to 81.2 from 82.5 a month earlier. The index averaged 89 in the five years before December 2007, when the last recession began, and 64.2 in the 18-month contraction that ended in June 2009.
The rate will climb to 3.15 percent by the end of June, and 3.43 percent by year-end, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.
The Fed’s preferred inflation gauge compared with 0.9 percent in November, according to the Commerce Department. The forecast was for 1.1 percent rise in December, according to economists in a Bloomberg News survey. The last time it was 2 percent, in line with the central bank’s target, was April 2012.
“Our own economic data, which has been decidedly mixed,” has led to more demand for Treasuries, said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York.
The Treasury drew the highest auction demand since 2012 this week as it sold $111 billion in four note offerings as investors sought the haven of U.S. government debt.
Investors submitted bids of 3.2 times the amount of debt sold, the most in 14 months, buoyed by demand for the U.S.’s first offering of floating-rate notes. The auction of the notes, the first added U.S. debt security in 17 years, attracted almost double the average for the past six sales of comparable conventional Treasuries.