Treasuries Gain for Second Week on Malaysia Plane, Gaza Invasion

Treasuries rallied for a second week as a missile brought down a Malaysian passenger jet in the eastern Ukraine conflict zone and the Israeli military invaded the Gaza Strip, fueling refuge demand.

Yields on 30-year bonds reached the lowest level in more than a year as the U.S. and the U.K. called for Russia to end the war in the Ukraine. The difference between five- and 30-year yields narrowed to the least since 2009 after Federal Reserve Chair Janet Yellen told lawmakers that monetary stimulus is still merited, while interest-rates increases may occur sooner if the economy accelerates. The Treasury will sell $15 billion of 10-year inflation-protected securities on July 24.

“These geopolitical events could spin out of control,” said William Larkin, a money manager who oversees $520 million in assets at Cabot Money Management in Salem, Massachusetts. “There’s a bid for Treasuries because that’s the insurance policy that gets put on.”

The 10-year yield dropped four basis points this week, or 0.04 percentage point, to 2.48 percent in New York, according to Bloomberg Bond Trader prices. The 2.5 percent note maturing in May 2024 added 10/32, or $3.13 per $1,000 face amount, to 100 5/32. The yield fell as much as nine basis points on July 17, the most since March 13.

Market Results

U.S. 30-year yields dropped five basis points on the week to 3.29 percent. It touched 3.26 percent on July 17, the least since June 2013. The Bloomberg U.S. Treasury Bond Index has gained 3.6 percent this year, after dropping 3.4 percent in 2013.

The gap between five-year notes and 30-year bonds shrank yesterday to as low as 162 basis points, the least since February 2009. Shorter maturities are more sensitive to what the Fed does with its benchmark rate, while longer-dated debt is more influenced by inflation.

“We have a flattening bias -- that’s a function of the market preparing for an eventual tightening in policy, even though it’s some ways off,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York.

Hedge-fund managers and other large speculators reduced bets on a decline in 10-year notes in the week ending July 15, according to U.S. Commodity Futures Trading Commission data. Speculative net-short positions, or bets prices will fall, were reduced to 53,626 contracts, from 96,772 the week before.

Futures Positions

Speculators reversed positions in futures on Treasury bonds to a 25,732 net-long position, CFTC data show. The traders were net short 4,357 contracts the week before.

Treasuries pared weekly gains yesterday as the U.K. and the U.S. raised pressure on Russia to end support for the rebels blamed for the downing of the Malaysian Boeing 777 that killed all 298 people on board as the United Nations Security Council met to discuss the crash.

Israel’s movement of troops and tanks into the Hamas-controlled coastal enclave July 17 marks the first significant Israeli ground operation in Gaza since 2009. It follows intensified aerial attacks in which more than 200 Gaza residents were killed.

“There are too many geopolitical risks,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “You have the Middle East problem with Israel going into Gaza. With all the uncertainty, why take a risk?”

Term Premium

The 10-year term premium, a measure of the extra yield investors are demanding to hold longer-term securities, dropped to 0.51 percentage points on July 17, the lowest level since May 2013, according to Fed data. The level is down from a 2014 high of 1.6 percentage points in January and suggests investors are demanding less compensation when buying the securities.

Traders see a 60 percent chance the Fed will increase its key rate by July 2015, federal funds futures contracts show, down from 62.8 percent a month ago. The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25 percent since December 2008.

“If the labor market continues to improve more quickly than anticipated,” then increases in the federal funds rate target likely would occur sooner than currently envisioned, Yellen told the House Financial Services Committee July 16. Yellen said the central bank plans to release stimulus-exit-plan details later this year.

With the Fed seeking to assess the pace of the economy, a government report July 25 is forecast to show orders of durable goods rose by 0.4 percent in June after dropping by 0.9 percent in May.

Economic Outlook

Retail sales increased 0.2 percent in June after a 0.5 percent advance in May that was larger than previously reported, Commerce Department figures showed July 15. The reading fell short of the 0.6 percent increase projected by the median estimate of 83 economists surveyed by Bloomberg.

“The June numbers were a small miss, but there were actually pretty healthy upward revisions to the previous data,” said John Briggs, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed.

Gross domestic product expanded 3.3 percent at an annual rate in the second quarter, according to the median forecast in a Bloomberg News survey of economists. GDP contracted at a 2.9 percent rate in the first quarter, the worst performance since 2009.

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