U.S. 10-Year Yield Falls Most Since 2011 on Emerging-Market Rout

Treasury 10-year yields dropped the most since August 2011 as uneven economic data and an exodus from emerging-market assets fueled demand for the safety of U.S. government securities.

Benchmark 10-year yields reached the least in 12 weeks as growth slowed in China and Russia and as central banks in India, Turkey and South Africa sought to stem capital outflows, as the Federal Reserve cut bond purchases. U.S. central bank policy makers expressed optimism about improved U.S. economic growth before a Labor Department report on Feb. 7 forecast to show an increase of 180,000 in January nonfarm payrolls.

“You had a bond market that was short, expecting rates to rise at the same time you had some flight-to-quality flows come in because of worries about the stock market, worries about what was happening in emerging markets,” said Donald Ellenberger, who oversees about $10 billion of fixed-income assets as head of multi-sector strategies at Federated Investors in Pittsburgh. “That was a rather combustible mix.” A short position is a bet that an asset will decline in value.

The 10-year yield fell 38 basis points in January, or 0.38 percentage point, to 2.64 percent in New York, touching the lowest level since Nov. 8, according to Bloomberg Bond Trader prices. The 2.75 percent security maturing in November 2023 rose 3 1/4, or $32.50 per $1,000 face amount, to 100 29/32.

Downgrade Echo

The drop in 10-year yields was the most since the month 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.

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, 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.

Thirty-year bond yields fell 37 basis points last month to 3.60 percent.

Speculative net-short positions in 10-year note futures doubled to 117,759 contracts as of Jan. 28.

Bond Returns

The Bloomberg U.S. Treasury Bond Index rose 1.6 percent last month through Jan. 30, the biggest gain since May 2012.

Investors sought safety in January as industry data on China showed manufacturing slowed. A Bloomberg customized ranking 20 developing-nation currencies fell 3.2 percent in January.

Turkey’s central bank raised all its main interest rates at an emergency meeting Jan. 29, including an increase in the one-week repo rate to 10 percent from 4.5 percent. India and South Africa unexpectedly raised rates this week, after Brazil boosted its benchmark earlier in the month.

The 4 percent drop in the MSCI All-Country World Index of equities was the biggest in almost two years, and followed a 24 percent surge in 2013, after accounting for reinvested dividends. About $1.8 trillion was lost from worldwide share values in January.

Less Risk

“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.

The Fed announced Jan. 29 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. Central bank policy makers next meet March 19 in Washington.

Orders for long-lasting equipment unexpectedly slumped in December by the most in five months, indicating companies are less sure than households that the U.S. economy is strengthening, according to Commerce Department data issued Jan. 28. The Fed’s preferred inflation gauge rose 1.1 percent in December, compared with 0.9 percent in November, according to the Bureau of Economic Analysis. The last time it was 2 percent, in line with the central bank’s target, was April 2012.

Economic Analysis

“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.

Treasury yields fell after the Labor Department said on Jan. 10 that the economy added 74,000 jobs in December, trailing the median forecast of 197,000 in a Bloomberg News survey of 90 economists. The unemployment rate fell to 6.7 percent, the lowest since October 2008.

Consumer spending that rose at the fastest pace in three years helped the U.S. economy grow at a 3.2 percent pace in the fourth quarter, overcoming government cutbacks and laying the foundation for a stronger expansion, the Commerce Department reported Jan. 30. In addition to the forecast jobs gains, the unemployment rate remained at 6.7 percent in January, according to the median estimate in a Bloomberg survey of economists.

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.

Debt Auctions

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.

“When you have four auctions, including one in which there was no prior liquidity, and a Federal Open Market Committee meeting, the auctions overall went pretty well,” said Thomas Simons, a money-market economist in New York at Jefferies LLC, one of 21 primary dealers required to bid at U.S. debt offerings. “The Treasury should be reasonably pleased with the performance of the auctions.”

Ten-year yields will rise to 3.15 percent by June 30 and 3.43 percent by Dec. 31, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

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