Geopolitical tension pushing world back to U.S. Treasuries

Obamacare will hold down inflation

Treasuries rose, pushing 30-year bond(CBOT:USM14) yields to the lowest level in nine months, as tensions between Ukraine and Russia escalated, boosting haven demand.

U.S. debt strengthened as Ukrainian units backed by armored personnel carriers blocked all approaches to the town of Slovyansk, Russia’s state-run RIA Novosti news service reported, citing an unidentified pro-Russian activist. U.S. consumer prices rose by 1.5 percent in March from a year earlier, the Labor Department reported, and remained below the Federal Reserve’s 2 percent inflation target.

“The Ukraine story leans on the fact that there’s some risk out there,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There are casualties, aggression and no certainty about the outcome. It’s just an unstable situation.”

U.S. 30-year Treasury bond yields fell two basis points, or 0.02 percentage point, to 3.47 percent as of 10:34 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 3.625 percent securities maturing in February 2044 added 3/8, or $3.75 per $1,000 face amount, to 102 7/8. The yield fell to as low as 3.46 percent, the least since July 3.

Benchmark 10-year yields fell two basis points to 2.63 percent. The yield reached 2.60 percent yesterday, the least since March 3.

Bond Returns

Treasuries have returned 2.3 percent this year, including a 0.6 percent rise this month, according to the Bloomberg U.S. Treasury Bond Index. The debt lost 3.4 percent last year.

The term premium, a gauge that includes expectations for interest rates, growth and inflation, was at 0.48 percent. It was as low as 0.46 percent on April 11, the most expensive since March 18.

Fed policy makers are unwinding the bond-buying program they have used to support the economy, while keeping their target for overnight lending between banks in a range of zero to 0.25 percent since 2008. The central bank will acquire $1.75 billion to $2.25 billion of Treasuries maturing from January 2020 to March 2021 today.

Russia’s holdings of U.S. government securities fell in February to $126.2 billion, the lowest level since 2011, from $131.8 billion the previous month, Treasury Department data released in Washington showed. It was the fourth straight month of declines in Russia’s holdings. The figures were part of a monthly report showing foreign holders of Treasuries as well as international portfolio flows.

Foreign Investors

China, America’s largest overseas creditor, owned $1.27 trillion of Treasuries in February, down by $2.7 billion from the previous month. The high was $1.32 trillion in November. Japan holdings increased by $9.1 billion to hold at a record $1.2 trillion.

The consumer-price index climbed 0.2 percent after increasing 0.1 percent the prior month, a Labor Department report showed. The median forecast of 82 economists surveyed by Bloomberg called for a 0.1 percent rise.

“Inflation remains very low and that results in low yields,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The markets are not really reacting that much. It’s largely in line.”

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 2.15 percentage points. The average over the past decade is 2.21 percentage points.

The Treasury Department will sell $18 billion in five-year inflation-indexed bonds on April 17.

Medical Costs

President Barack Obama’s health-insurance law will hold down consumer prices for years to come as millions of Americans obtain coverage under the Patient Protection and Affordable Care Act, BNP Paribas SA and Credit Suisse Group AG said.

Costs for medical care increased 2 percent last year, the smallest gain in 65 years, according to data compiled by the Labor Department. In the two decades before the financial crisis, health-care expenses rose at more than twice that rate on an annual basis.

“Inflation is already very low, so having one more category that lowers it even more makes nominal Treasuries even more attractive,” Aaron Kohli, an interest-rate strategist at BNP Paribas, one of 22 primary dealers that trade with the Fed, said in an April 10 telephone interview from New York.

The 10-year yield will rise to 2.98 percent by the end of June before climbing to 3.35 percent by the end of the year, according to the weighted average of analyst estimates compiled by Bloomberg.

 

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