Treasuries Climb as Negative Swiss Rates Fuel U.S. Value Play

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Treasuries advanced after the Swiss National Bank’s unexpected decision to scrap its exchange-rate cap and lower already-negative rates drove investors to higher-yielding U.S. debt.

Benchmark 10-year securities yielded 70 basis points more than the average of their Group of Seven peers, according to Bloomberg data. Thirty-year bond yields dropped to a record for a second day as a report showed U.S. wholesale prices fell last month, indicating inflationary pressures eased. The Swiss franc surged to a record versus the euro on speculation the European Central Bank will decide at a meeting this month to buy bonds under quantitative easing.

“The Swiss move is being interpreted as a signal the long-awaited QE in Europe is going to be announced next week,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 22 primary dealers that trade with the Federal Reserve. U.S. yields “look too high relative to Europe if rates fall over there. We’re even going to have more currencies in the world looking for a home for investment.”

The 10-year yield dropped 14 basis points, or 0.14 percentage point, to 1.71 percent at 4:59 p.m. in New York. It fell for a fifth straight day and touched 1.70 percent, the lowest since May 2013. The price of the 2.25 percent note due in November 2024 gained 1 9/32, or $12.81 per $1,000 face amount, to 104 26/32, according to Bloomberg Bond Trader prices.

Yield Forecast

The 10-year yield will rise to 2.8 percent in the fourth quarter, according to the median forecasts of strategists and economists in a Bloomberg News survey compiled Jan. 9-14. The figure is down from an estimate of 3.01 percent in the December survey.

Thirty-year yields sank 10 basis points to 2.37 percent. It set a new record of 2.35 percent today.

“The run-up in the market surprised most investors,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. “The market is not going to cool off until the ECB decision on QE.”

Treasuries have returned 1.9 percent this month, according to the Bloomberg U.S. Treasury Bond Index, after gaining 6.2 percent in 2014. Global yields have fallen this year, fueling demand for relatively higher U.S. yields. U.S. 10-year notes yielded higher than 17 developed nations around the globe, according to data compiled by Bloomberg.

Bond Demand

“You’ll continue to see demand for longer maturities, given the relative cheapness of the U.S. to the rest of the world,” said Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald LP in New York.

Switzerland’s central bank ended its three-year-old cap of 1.20 franc per euro and cut the interest rate on sight deposits over a certain limit.

After ending the cap, the SNB is unlikely to sell euro-denominated assets it has amassed since it started defending the peg, Morgan Stanley said in a note to clients.

“They are more likely to increase dollar holdings by reinvesting cash-flows from European government-bond redemptions into Treasuries,” Morgan Stanley strategists including Anthony O’Brien wrote.

U.S. debt briefly pared gains as oil rose to more than $50 a barrel for the first time since Jan. 6 before resuming a decline.

Market Stress

The 14-day relative-strength index for the 10-year note yield dropped for a second day below 30, a threshold that signals a security may be poised for a change in direction.

Treasuries have rallied this year as falling commodity prices suggest inflation will slow, increasing the value of fixed payments from bonds. The Bloomberg Commodity Index tumbled to the lowest level since 2002 yesterday.

The difference between yields on 10-year notes and similar maturity Treasury Inflation Protected Securities, or TIPS, was 1.57 percentage points, after reaching 1.49 percentage points on Jan. 14, the lowest since August 2010. The spread indicates traders’ outlook on inflation for the life of the debt.

West Texas Intermediate for February delivery fell 4.6 percent to $46.25 a barrel on the New York Mercantile Exchange after climbing 5.8 percent earlier to $51.27.

The U.S. producer-price index’s 0.3 percent decrease was the biggest since October 2011 and followed a 0.2 percent drop the prior month, a Labor Department report showed. The median estimate in a Bloomberg survey called for a 0.4 percent fall.

A report tomorrow is forecast by economists to show the consumer price index declined 0.4 percent in December from the previous month, compared with a 0.3 percent drop in November.

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