Treasuries in Biggest Weekly Gain in a Month Amid Global TurmoilSusanne Walker
Treasury 10-year notes rose the most this week in almost a month as turmoil in the Middle East and Ukraine fueled demand for the safety of U.S. government debt.
U.S. 10- and 30-year yields reached the lowest levels in more than a year following President Barack Obama’s decision to authorize U.S. air strikes in Iraq and as a truce in Gaza ended in violence. Government bonds pared weekly gains today amid signs Russia is trying to de-escalate tension in Ukraine.
“The manifestation of geopolitical issues is compounding and adding to the buying,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “There haven’t been a lot of opportunities to sell the Treasury market.”
The U.S. 10-year yield dropped seven basis points on the week, or 0.07 percentage point, the most since July 11. It was little changed at 2.42 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield fell as much as six basis points earlier to 2.35 percent, the lowest since June 20, 2013. The price of the 2.5 percent note due May 2024 slipped 2/32, or 63 cents per $1,000 face amount, to 100 22/32.
Treasury 30-year bond yields declined five basis points on the week to 3.23 percent. They sank today to as low as 3.18 percent, the least since June 6, 2013, before trading little changed.
The contract for 10-year Treasury note futures traded at 126 17/32 today, a level it last reached on May 29. The security also touched that level in March.
Hedge-fund managers and other large speculators raised bets in the week ending Aug. 5 on a decline in U.S. 10-year notes to the most since July 18, according to U.S. Commodity Futures Trading Commission data. Speculative net-short positions, or bets prices will fall, increased to 45,131 contracts, from 5,806 contracts the week before, the least since August 2013.
Speculators reversed bets in futures on Treasury five-year notes to a 8,987 contract net-short position, the biggest since July 11. That compared with a net long position of 34,080 contracts the previous week, CFTC data show.
The difference between the rate on a two-year interest-rate swap and U.S. Treasury yields increased to the widest in more than a year as global stocks fell before rebounding on Russia’s signaled certain drills ended.
The swap spread widened to as much as 24.38 basis points, or 0.2438 percentage point, the most since June 24, 2013, from 23.25 basis points yesterday and a 2014 low of 8.94 basis points on April 23. The gap, a gauge of investor perceptions of credit risk, is based on speculation on the London interbank offered rate, or Libor.
Government bonds around the world gained earlier as U.S. warplanes struck at militants from the Islamic State in Iraq. Two fighter jets attacked an artillery position used by the militants against Kurdish forces defending Erbil, where U.S. diplomats and some military personnel are based, Rear Admiral John Kirby, a Pentagon spokesman, said in a statement.
Obama said yesterday air strikes would be used to protect U.S. personnel and Yezidis, a minority sect concentrated in northern Iraq, who have been targeted by militants and are stranded on a mountain.
Israeli aircraft bombed Gaza in response to rocket fire by Palestinian militants.
German 10-year yields dropped as much as four basis points to a record-low 1.023 percent before trading at 1.05, down one basis point. German two-year rates fell to as low as minus 0.005 percent, the least since May 2013. Australia’s 10-year yield declined as much as 14 basis points to 3.28 percent, the lowest since June 2013.
The U.S. 10-year yield is more than double that of its German peer, said Ray Remy, head of fixed income in New York at primary dealer Daiwa Capital Markets America Inc.
“International money” will continue to move into the U.S. 10-year because the yield is higher, Remy said.
Treasuries were supported as U.S. yields higher than those of other government bonds lured buyers. The premium that benchmark U.S. 10-year notes offer over Group of Seven counterparts was 69 basis points, versus a 49 basis-point average over the past year. It reached 78 basis points on July 31, the most since 2007.
Sovereign securities pared advances after Russia’s Defense Ministry said warplanes ended drills in the region near Ukraine. RIA Novosti said Russia is ready to mediate between Ukraine and rebels who are battling government troops in the east of the country. It cited Russian Security Council head Nikolai Patrushev.
“The idea is that there’s less of a concern about Ukraine,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The rally is all safe-haven buying and geopolitical risk.”