Treasuries gained the most this month since January as faltering European growth and turmoil in Ukraine prompted investors to seek higher-returning U.S. government debt even with the economy strengthening.
Yields on U.S. bonds reached the highest since 2007 versus developed-nation peers as euro-area rates tumbled. The difference between yields on U.S. five- and 30-year debt flattened to the least since January 2009 even as data showed the U.S. economy grew more than forecast in the second quarter. A report next week is forecast to show the U.S. added more than 200,000 jobs for a seventh straight month.
“The story for the month has been investors buying expensive Treasuries because when they look around, everything else is even more expensive,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “There has been a flight to safety and the relative value of the U.S. as the European economic situation remains in limbo.”
The U.S. 10-year note yield dropped 21 basis points, or 0.21 percentage point, in August to 2.34 percent in New York, according to Bloomberg Bond Trader data. It fell six basis points on the week. The yield touched 2.32 percent, after reaching 2.30 percent on Aug. 15, the lowest since June 2013. The price of the 2.375 percent securities due in August 2024 rose 17/32, or $5.31 per $1,000 face amount, to 100 9/32.
Thirty-year bond yields sank 24 basis points this month, also the most since January, to 3.08 percent. They fell eight basis points on the week and touched 3.06 percent, the least since May 2013.
Treasuries returned 1.2 percent this month through Aug. 28, the most since a gain of 1.6 percent in January, according to the Bank of America Merrill Lynch U.S. Treasury Index. They have advanced 4.3 percent this year, after losing 3.4 percent in 2013.
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.
A collapse in yields in the euro area amid bets the European Central Bank will move further to stimulate the economy prompted investors to reach for relatively higher-yielding U.S. government bonds.
“What’s driving the U.S. Treasury market is what’s going on in Europe,” Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade with the Federal Reserve, said Aug. 27. “As Europe moves to lower yields, money is moving into the U.S. Treasury market to take advantage of the bigger spread between the two.”
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. Data yesterday showed euro-area consumer prices rose 0.3 percent in August from a year earlier. Policy makers’ inflation goal is just under 2 percent.
German 10-year bund yields reached a record-low 0.866 percent on Aug. 28, and French 10-year government-bond yields fell to a record 1.217 percent.
“As long as European yields keep going lower and European data and news continue to outweigh U.S. data, these low yields don’t look like they’re going to change any time soon,” Stanley Sun, a New York-based strategist at the primary dealer Nomura Holdings Inc., said Aug. 28.
The extra yield U.S. 10-year notes offer over their Group of Seven counterparts reached 79 basis points on Aug. 26, the most since June 2007, according to data compiled by Bloomberg. It was 37 basis points in February.
Pro-Russian separatists in eastern Ukraine battled government forces 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.
Treasuries gained even as Commerce Department data showed U.S. gross domestic product rose at a 4.2 percent annualized rate, up from an initial estimate of 4 percent, after a first-quarter contraction.
Hedge-fund managers and other large speculators were bullish on 10-year note futures for the first time in a year, U.S. Commodity Futures Trading Commission data showed yesterday. 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.
The difference between yields on U.S. five- and 30-year debt, known as the yield curve, touched 142 basis points on Aug. 28, the least since January 2009. It was 145 basis points yesterday. The average over the past year is 201 basis points.
Fed Chair Janet Yellen told central bankers last week in Jackson Hole that U.S. policy makers may raise interest rates sooner than investors anticipate amid labor-market gains. Shorter-term yields, which are more sensitive to Fed policy than longer maturities, stayed higher.
U.S. employers added 225,000 jobs in August, economists surveyed by Bloomberg forecast before the Labor Department reports the data on Sept. 5.
The U.S. sold $106 billion in fixed-and floating-rate notes this week: $29 billion in seven-year debt, $35 billion in five-year securities, $29 billion in nominal two-year Treasuries and $13 billion in two-year floating-rate notes.