U.S. 30-Year Yield at Almost 1-Year Low on Ukraine, Gaza Tension

Treasury 30-year yields traded at almost 13-month lows as investors assess reaction to the downing of a Malaysian airline over eastern Ukraine and conflict in the Gaza Strip.

The yield difference between two- and 30-year securities widened from the least in more than a year as sales of previously owned U.S. homes climbed in June to an eight-month high. U.S. debt erased earlier losses as a government report showed the annual increase in U.S. consumer prices in June was

2.1 percent, unchanged from the previous month.

“Some of the global concerns have abated, but there are still geopolitical concerns to contend with,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Inflation data is still benign, and that has taken some pressure off of Treasuries.”

The 30-year yield was little changed at 3.25 percent at 5:05 p.m. New York time, according to Bloomberg Bond Trader data. The 3.375 percent bond due in May 2044 traded at 102 11/32. The yield rose as much as three basis points. It dropped to 3.24 percent yesterday, the lowest level since June 7, 2013.

Debt Returns

Treasuries have returned 3.5 percent this year through yesterday, according to the Bloomberg World Bond Indexes. The S&P 500 gained 8 percent including reinvested dividends.

The additional yield, or spread, investors demand to hold U.S. 10-year Treasuries compared with German bunds was 129 basis points. It reached 137 basis points on July 4, the most since 1999, according to data compiled by Bloomberg.

“The continued geopolitical risk and the fact that Treasuries are still cheap to European debt will cap how high yields can go,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

Home sales increased 2.6 percent to a 5.04 million annual rate last month, led by gains in all four U.S. regions, figures from the National Association of Realtors showed. The median forecast of 78 economists surveyed by Bloomberg projected sales would rise to a 4.99 million rate.

“The report continues to show strengthening fundamentals,” Gennadiy Goldberg, U.S. strategist with TD Securities in New York, wrote in a note to clients.

Inflation Outlook

The consumer price index increased 0.3 percent last month after a 0.4 percent gain the prior month, matching median forecast of 85 economists surveyed by Bloomberg, figures from the Labor Department showed.

“There isn’t sufficient inflation translating through the economy; it’s one of the reasons bond yields stay so low,” said Thomas di Galoma, head of fixed-income rates at ED&F Man Capital Markets in New York.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed at 222 basis points. The average for the past decade is 221 basis points.

The Treasury will sell $15 billion of 10-year inflation-protected securities on July 24.

The Federal Reserve’s target for inflation is 2 percent, as measured by the Commerce Department’s personal consumption expenditures price index. The gauge increased 1.8 percent in May from a year earlier, based on the latest data, also the most since October 2012.

Fed View

With short-term notes anchored by the Fed’s benchmark interest rate, its target for overnight lending between banks, longer-term yields fell yesterday as investors sought the safety of Treasuries.

The difference in yields on two- and 30-year Treasuries was at 278 basis points, after narrowing to 275 basis points yesterday, the least since May 2013.

Shorter maturities are more sensitive to what the Fed does with interest rates, while longer-dated debt is more influenced by the outlook for inflation.

Pro-Russian rebels released bodies gathered from the crash site of the Malaysian jet that was shot down over eastern Ukraine last week. Meanwhile, U.S. Secretary of State John Kerry arrived in Cairo to mediate a truce that would end fighting in Gaza.

“There’s still a lot of caution and people don’t know how things are going to unfold,” said Carlos Pro, an interest-rate strategist at Credit Suisse Group AG in New York, one of 22 primary dealers that trade with the Fed. “The trend higher that we envisioned in yields is probably prevented.”

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