Treasuries Poised for Biggest Return in Three Years Amid Turmoil

Treasuries are headed for the best annual performance since 2011 as global turmoil and low U.S. inflation supported prices even while the economy improved and the Federal Reserve signaled it’s on track to raise interest rates in 2015.

The 10-year note yield touched the lowest level in a week as crude oil traded near the least in five years and global risk appetite ebbed. The security’s yield advantage over Group of Seven peers was almost at an eight-year high after Greek Prime Minister Antonis Samaras failed yesterday to win backing for his presidential nominee, a development that risks severing the nation’s bailout accord. The yield curve, the gap between two-and 30-year yields, was at almost a six-year low.

“It’s the political events in Europe, the disinflation-deflation story that’s persistent together with oil,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “We don’t have a runaway rally mainly because most people have closed their books well before today.”

U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 2.19 percent at 5 p.m. New York time. They reached 2.17 percent, the lowest since Dec. 23. Yields sank five basis points yesterday, the most since Dec. 16. The price of the 2.25 percent note due in November 2024 rose 1/8, or $1.25 per $1,000 face amount, to 100 17/32.

The yield curve was at 207 basis points after reaching 201 basis points on Dec. 23, the flattest since January 2009, as the shorter-term securities fell amid speculation on a Fed rate increase. Shorter maturities are more sensitive to changes in central-bank policy, while longer-dated debt is more sensitive to inflation, which erodes returns.

Holiday Observance

The Securities Industry and Financial Markets Association recommends that trading in Treasuries closes at 2 p.m. New York time tomorrow and stays shut the following day for the New Year’s holiday.

Hedge-fund managers and other large speculators trimmed positions that profit from a decline in 10-year note futures after increasing them a week earlier to the most since May 2010, according to U.S. Commodity Futures Trading Commission data released today. Net-short positions totaled 235,916 contracts as of Dec. 23, 22,334 fewer than the week before.

Speculators boosted positions that gain from a decline in 30-year bond futures to the most since March 2012, the CFTC data showed. Net-short positions totaled 31,952, or 8,001 more contracts than the week before.

Returns Rise

U.S. government securities have returned 5.9 percent this year, according to the Bloomberg U.S. Treasury Bond Index, set for the biggest annual gain since 2011’s 9.8 percent. Treasuries due in 10 years and longer have returned 24 percent this year, while Treasuries due in one to five years have risen 1.2 percent, the Bloomberg Treasury indexes show.

The benchmark U.S. 10-year note yielded 99 basis points more than the average of its G-7 peers. The spread reached 101 basis points on Dec. 23, the widest since November 2006.

“It’s pretty good value to buy when you look at the yield ratio compared to other rates,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “Treasuries look like the best buy on the board given everything that’s going on. It’s the advantage of being the global flight-to-quality asset.”

Oil Slump

Oil, which has slumped about 46 percent this year, reached a five-year low of $52.70 a barrel in New York before trading at $53.87. Russian cooperation on negotiations to end turmoil in Syria and Iran will be affected by additional U.S. sanctions imposed yesterday over the 2009 death of a lawyer, the nation’s Foreign Ministry said in a statement on its website.

Greece faces snap elections next month after Samaras failed in three attempts to win parliamentary approval for his candidate for head of state. The opposition party Syriza opposes austerity measures tied to an international lifeline that has supported the country after it sparked Europe’s sovereign-debt crisis in 2010.

Treasuries remained higher today even after the Conference Board’s consumer confidence index increased to 92.6 in December, from 91 a month earlier, the New York-based private research group said. The median forecast in a Bloomberg survey called for a gain to 93.9.

A measure of volatility rose yesterday from a two-week low. Bank of America Merrill Lynch’s MOVE Index jumped to 69.2, from 55.4 on Dec. 26. It was 69 today. The average this year is 62.

Volume Slips

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, declined 5.5 percent from yesterday to $155 billion. The 2014 daily average is $328 billion.

Analysts are unanimous in predicting yields will increase next year as the Fed prepares to raise interest rates for the first time since 2006, according to forecasts by Bloomberg. Fed Chair Janet Yellen suggested Dec. 17 the central bank may increase interest rates sooner than anticipated next year.

Treasuries fell last week when data showed the world’s biggest economy grew 5 percent in the third quarter, the fastest pace in 11 years.

A measure of inflation expectations over the next decade was at almost a four-year low amid the oil slump. The 10-year break-even rate, the difference between yields on 10-year notes and comparable Treasury Inflation Protected Securities, was at 1.64 percentage points. It reached 1.58 percentage points on Dec. 16, the lowest level since September 2010.

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