Treasuries Bears Capitulation Sends Bond Yields to 11-Month Low

Treasuries rallied, with 30-year bond yields falling to an 11-month low, as weak U.S. economic data and signs of more monetary stimulus in Europe spurred traders to capitulate on bets for higher interest rates.

Yields on the longest-maturity U.S. government security dropped by the most since March after reports showed lower-than-forecast retail sales and unexpected declines in industrial production and consumer confidence. Accommodative comments from European Central Bank and the Bank of England officials raised the relative attractiveness of Treasuries. The U.S. will sell $13 billion of inflation-protected debt next week.

“Everyone has been expecting higher rates, but they haven’t come,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

Thirty-year yields fell 12 basis points, or 0.12 percentage point, this week to 3.35 percent, according to Bloomberg Bond Trader prices. Yields dropped to 3.30 percent on May 15, the least since June. The 3.375 percent security maturing May 2044 gained 2 6/32, or $21.88 per $1,000 face amount, to 100 17/32.

The long bond has returned 13 percent this year through May 15, the biggest return for that period since 1995. This year’s rally compares with a 15 percent loss for all of 2013, according to Bank of America Merrill Lynch indexes.

The yield on the benchmark 10-year note yield fell 10 basis points to 2.52 percent. It dropped below 2.5 percent for the first time since October, touching 2.47 percent two days ago.

Net Longs

Gains in Treasuries were due to “a series of different ongoing issues that have supported the long-bond,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Pension-fund allocations, a lower-for-longer-Fed and the shifting monetary policy expectations overseas” and a reduction in bets that the securities will lose value all contributed.

Hedge-fund managers and other large speculators increased so-called net long positions in 30-year bond futures in the week ending May 13, according to U.S. Commodity Futures Trading Commission data released yesterday.

Speculative long positions, or bets prices will rise, outnumbered short positions by 62,677 contracts on the Chicago Board of Trade. Net-long positions rose by 27,000 contracts, or 76 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

With the Federal Reserve winding down stimulus and the U.S. economy expanding, long-bond yields will finish the year at 4.04 percent, according to weighted average in a Bloomberg survey of 53 respondents that places a greater emphasis on most recent projections.

Slower Growth

Economic measures fell below forecasts. Retail sales increased 0.1 percent after a revised 1.5 percent surge in March that was the biggest since March 2010, the Commerce Department said May 13. The median forecast of 83 economists surveyed by Bloomberg called for a 0.4 percent advance. U.S. industrial production unexpectedly fell in April, declining 0.6 percent, a May 15 Fed report showed.

The Thomson Reuters/University of Michigan preliminary index of sentiment was 81.8 this month, below the 84.5 median forecast of economists in a Bloomberg News survey.

Fed Chair Janet Yellen told Congress last week that even after adding 288,000 jobs in April, the U.S. economy still needs support. Yellen reiterated that the Fed’s benchmark interest-rate target will stay near zero for a “considerable time” after the end of a bond-purchase program to spur growth.

Central Banks

Futures prices put the likelihood the Fed will start raising its benchmark interest rate by its June 2015 policy meeting at 43 percent, down from 52 percent a month ago, based on trading on the CME Group Inc.’s exchange.

While traders forecast the Fed won’t raise rates until next year, policy makers in Europe paved the way for lower yields.

European Central Bank President Mario Draghi signaled last week officials are ready to reduce interest rates in June if needed. Bank of Japan Governor Haruhiko Kuroda said May 15 that the BOJ has many options to “ease monetary conditions” if necessary.

The U.S. will sell $13 billion of 10-year Treasury Inflation Protected Securities on May 22. The difference between the yield on the notes and non-indexed U.S. debt of comparable maturity is 2.18 percentage points, compared with 2.23 percentage points at the end of 2013.

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