Treasury Bond Rally Sends Yield to 15-Month Low on Demand

Treasuries advanced, pushing 30-year bond yields to a 15-month low, as the collapse of yields in Europe prompted investors to reach for higher-yielding U.S. government bonds.

An auction of $35 billion in five-year notes drew the highest demand in 13 months from an investor class including foreign central banks as the debt yielded almost the most over its German equivalent in nine years. Federal Reserve Chair Janet Yellen said last week interest rates may rise from zero sooner than policy makers estimate on labor markets gains, while weaker data in Europe is spurring speculation the European Central Bank will consider quantitative easing.

“The rally is being led by what’s going on in Europe and the bond markets there,” said Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that are obligated to bid in U.S. debt auctions. “The Fed is in play, so you’d best be out the curve a bit in the seven- to 10-year sector, as long as there are no hiccups with inflation.”

Yields on 30-year bonds dropped six basis points, or 0.06 percentage point, to 3.1 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The level is the lowest since May 22, 2013. The 3.125 percent note maturing in August 2044 rose 1 5/32, or $11.56 per $1,000 face amount, to 100 14/32.

The benchmark 10-year yield dropped four basis points to 2.36 percent, the least since Aug. 18. Two-year note yields rose one basis point to 0.51 percent, earlier narrowing the difference, or spread, between two- and 10-year yields to the least in more than a year.

European Yields

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell to $273.6 billion, from $275 billion yesterday. This year’s average is $323 billion. Daily volume reached $504 billion on Aug. 1, the highest level in three months.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, climbed to 56.87 from 56.45 yesterday. The 2014 average is 59.

European debt yields plunged to record lows after ECB President Mario Draghi said on Aug. 22 that bets on price increases in the currency bloc “exhibited significant declines.” Policy makers hold their next rate-setting meeting on Sept. 4.

Record Lows

Spanish 10-year yields fell three basis points to 2.15 percent, after reaching 2.083 percent, the lowest since Bloomberg began tracking the data in 1993. The rate on Italy’s debt declined to as low as 2.343 percent, while that on French bonds slid to 1.228 percent, both records.

German yields dropped to less than 0.9 percent for the first time, while those on Austrian, Belgian, Dutch, Finnish, Irish debt also fell to lows.

Treasuries were also supported by buying for month-end extensions. Fixed-income funds that manage portfolios against benchmark indexes, including Barclays Plc’s U.S. Aggregate Index, typically buy longer-term Treasuries as a month ends to align the interest-rate sensitivity of their holdings with the indexes. The Barclays gauge will extend its duration by 0.09 year Sept. 1, matching the 0.09 year Aug. 1.

U.S. five-year notes yielded 146 basis points more than their German equivalent after widening to 148 basis points on Aug. 25, the most since November 2005. Treasuries yielded 79 basis points more than their G-7 counterparts, almost the widest since June 2007.

Rate Bets

Yellen’s comments made in Jackson Hole, Wyoming, on Aug. 22, added to speculation the central bank is preparing to boost interest rates next year. The majority of Fed officials predict the central bank will start raising borrowing costs in 2015 based on forecasts it published in June.

Traders saw about a 54 percent chance the Fed will increase its benchmark rate from the current range of zero to 0.25 percent by July 2015, according to futures data compiled by Bloomberg.

The five-year notes sold today yielded 1.646 percent, compared with a forecast of 1.645 percent in a Bloomberg News survey of six of the Federal Reserve’s 22 primary dealers.

Indirect bidders, which includes foreign central banks, purchased 52.7 percent of the notes, compared with an average of 46.4 percent for the past 10 sales and the most since July 2013.

‘Fantastic Auction’

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.81, versus an average of 2.73 for the past 10 sales.

“It was a fantastic auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers obligated to bid at U.S. auctions. “What’s driving the U.S. Treasury market is what’s going on in Europe. As Europe moves to lower yields, money is moving into the U.S. Treasury market to take advantage of the bigger spread between the two.”

The U.S. also sold $13 billion of two-year floating notes at a high discount margin of 0.055 percent, below the 0.07 percent last month. The securities drew bids for 4.38 times the amount available, versus 4.09 times the July 30 sale and a 4.73 average over the eight offerings of the notes since they were introduced in January.

The U.S. is scheduled to sell $29 billion of seven-year securities tomorrow. Yesterday’s two-year sale drew a yield of 0.53 percent, compared with 0.544 percent at the previous auction of the securities in July, which was the highest since May 2011.

The spread between the two- and 10-year note yields fell to 184 basis points today, the least since June 2013. A yield curve is a chart showing rates on bonds of different maturities, with a flatter curve suggesting some investors expect short-term interest rates to rise.

The butterfly spread formed by two-, five- and 10-year Treasury yields was 40 basis points, almost the the highest since August 2009. It has averaged 9.2 basis points over the past year. A higher reading signals investors are more bearish on the middle of the three securities, making it relatively cheap versus the others.

Before it's here, it's on the Bloomberg Terminal.