Treasury 30-year bonds rose, with yields close to the lowest levels in 11 months, as demand for the longest-maturity debt surges amid an absence of inflation before the U.S. sells $16 billion of the securities.
The long bond has returned 12 percent this year, the most for that period in data compiled by Bank of America going back to 1988. All U.S. government securities gained after Federal Reserve Chair Janet Yellen said in a second day of testimony before Congress that interest rates are unlikely to rise unless the economic recovery is stronger, and the European Central Bank suggested that it may cut rates next month.
“Even though the biggest buyer of Treasuries is slowly and surely fading away, there has been no shortage of players -- from pension funds to central banks --- who have jumped in to fill the gaps,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors.
The 30-year yield fell two basis points, or 0.02 percentage point, to 3.38 percent at 12:20 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 3.625 percent security due in February 2044 rose 3/8, or $3.75 per $1,000 face amount, to 104 1/2. The yield sank to 3.35 percent on May 5, the lowest level since June 19.
The benchmark 10-year note yield declined two basis points to 2.59 percent, and five-year yields decreased three basis points to 1.62 percent, the lowest since April 16.
Buyers of the longest-term Treasuries are facing a potential shortage of supply. Excluding those held by the Fed, Treasuries due in 10 years or more account for just 5 percent of the $12.1 trillion market for U.S. debt.
The 30-year bonds due to be sold today yielded 3.395 percent in pre-auction trading, the lowest level since the auction of the securities in June. The securities yielded 3.525 percent at last month’s auction. Investors at the 30-year sale on April 10 submitted bids for 2.52 times the amount of debt available, up from 2.35 times in March.
“Dealers have pulled back from setting up,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., referring to the 22 banks and investment firms that underwrite U.S. debt and are obligated to bid in U.S. government auctions. “People are afraid to be short.” A short is a bet the price of a security will drop.
At the previous auction, the primary dealers took 38.8 percent of the securities, the least since January.
Longer-term securities may get about $300 billion in extra demand from pension funds over the next two years that would equal almost half the $642 billion of the debt outstanding, according to data from Bank of Nova Scotia, a primary dealer.
In 2013, 30-year bonds led longer-term Treasuries to the worst losses among government debt globally, falling 12.5 percent. The securities have outperformed this year.
“There’s just very good demand for the long end,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “People have made their growth expectations lower and inflation has been subdued.”
Thirty-year bond yields will rise to 4.05 percent by year-end, according to the median forecast of economists surveyed by Bloomberg from May 2 to May 7. Ten-year yields will rise to 3.25 percent, they estimated.
U.S. government debt was supported as Russian President Vladimir Putin said his nation’s army is testing its combat readiness, ramping up tensions after he pledged a pullback from Ukraine’s border. NATO said there’s no sign of any Russian withdrawal. Pro-Russian separatists in Ukraine vowed to press ahead with autonomy votes.
Treasuries returned 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. U.K. gilts and German securities both earned 3.2 percent.
After keeping euro-area interest rates at record lows today, ECB President Mario Draghi told reporters that the 24-member Governing Council is “comfortable with acting next time.” Rates cuts in Europe increased the attractiveness of U.S. securities to international investors.
Yellen testified to the Senate Budget Committee, reiterating that while solid second-quarter economic growth bolsters the case for the tapering of central-bank bond purchases, inflation remains low. She said U.S. economic data show “solid growth” in the second quarter. Still, she said, “many Americans who want a job are still unemployed” and inflation is low.
The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 1.1 percent in March from a year ago, a report on May 1 showed. The gauge has fallen short of the bank’s 2 percent target for almost two years.