In Negative-Yield Era, Whopping Data Can’t Stop Treasuries Rally

  • Longer maturities rise even as jobs report trounces forecast
  • ‘Wall of buying’ at work in 10-, 30-year debt: TD’s Goldberg

The strongest U.S. labor report in eight months was no match for investors waiting in the wings for a chance to buy long-maturity Treasuries.

Yields on 10- and 30-year Treasuries ended Friday at record-low closing levels even after government data showed the U.S. created 287,000 jobs in June, 107,000 above the median forecast. The securities initially declined on the announcement as signs of economic strength boosted riskier assets.

But within a half hour, buyers who’d been itching for a selloff swooped in, driving yields lower. The dynamic reflects the tension in the $13.4 trillion Treasuries market between signs of domestic economic strength and the global stagnation that’s pushed yields on almost $10 trillion of government bonds worldwide below zero. Investors have poured into U.S. debt, confident the Federal Reserve is on hold. Even after the jobs report, the market-implied chances of another interest-rate increase are below 50 percent through 2017.

“There really appears to be a wall of buying in 10s and 30s,” said Gennadiy Goldberg, an interest-rate strategist in New York at TD Securities (USA) LLC, one of the 23 primary dealers that trades with the Fed. “There are people buying the dip quite hard.”

Rally Lengthens

Yields on benchmark 10-year notes declined nine basis points this week, or 0.09 percentage point, to 1.36 percent, the lowest closing level in data going back to 1962. U.S. 30-year yields sank 13 basis points on the week, to just below 2.1 percent, also setting an all-time low close. Both maturities have gained for six straight weeks, the longest rally since 2012.

Longer maturities gained in the face of auctions next week of a combined $32 billion of 10- and 30-year debt.

As low as they are, yields on 10-year Treasuries eclipse those on similar-maturity obligations of 17 other developed-market economies tracked by Bloomberg. Japanese 10-year debt yielded negative 0.29 percent Friday, while German notes yielded negative 0.19 percent.

It’s not just international investors piling in. Long-term asset managers like those overseeing the $3 trillion U.S. corporate pension industry may have no choice but to buy Treasuries during selloffs, according to Shyam Rajan and Subadra Rajappa, who head U.S. rates strategy at Bank of America Corp. and Societe Generale SA, respectively.

U.S. debt gained this week as the minutes of the Fed’s June meeting, released July 6, showed officials were losing confidence in the need to raise rates. Policy makers’ median forecast, released last month, called for one quarter-point hike in 2016, after officials this year twice lowered their projected path for rates.

Relationship Breakdown

As bets on another Fed increase fade and the universe of negative-yielding debt grows, the traditional relationship between U.S. stocks and bonds has broken down, with both assets often moving in tandem on the same information. Friday was no exception: As longer-term Treasuries rallied, the S&P 500 Index briefly climbed above its record close, propelled by the jobs data.

“We’ve seen economic-surprise indexes improve recently to the best levels in quite a while, we’ve seen risk assets perform pretty well,” said Mike Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $325 billion. “And still, it just hasn’t mattered for rates. Why would this strong nonfarm payrolls number differ?”

The Citi Economic Surprise Index, which measures data relative to market expectations, is the highest since 2015. A positive reading means reports have been stronger than anticipated.

The march lower in longer-dated yields left the gap between two- and 10-year yields the smallest since 2007, and many investors and analysts anticipate that it will keep shrinking with buyers waiting to pounce.

“It was a very abnormal day -- the initial reaction right after the employment number came in super strong, the bond market backed up,” said Jae Yoon, chief investment officer at New York Life Investment Management, which oversees $288 billion. “But it barely stayed there for a minute.” 

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