Geopolitics trump taper for Treasury traders

Treasury 10-year notes (CBOT:ZNU14) traded at almost the highest levels in seven weeks as investors awaited the response of global governments after the downing of a passenger jet in eastern Ukraine.

U.S. debt advanced last week, with the 30-year bond yield reaching the lowest level in more than a year as the U.S. suggested Russia provided the missile used by rebels to down the airliner. European Union foreign ministers meeting in Brussels tomorrow will consider tougher sanctions on Russian individuals and companies, according to a comment from U.K. Prime Minister David Cameron’s office.

“It’s the geopolitical headlines, Russia and Ukraine, Israel and Hamas,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Federal Reserve. “They will look at what the response will be from Russia versus the Western world.”

The benchmark U.S. Treasury 10-year yield was little changed at 2.48% as of 8:43 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5% note due in May 2024 was 100 6/32. The yield dropped four basis points, or 0.04 percentage point, last week.

The Treasury 10-year yield fell to 2.44% on July 17, the lowest since May 29.

Bond Returns

Treasuries returned 3.4% this year through July 18, according to Bloomberg World Bond Indexes. German securities gained 5.5% and U.K. gilts earned 4.4%.

Germany’s 10-year yield closed at the lowest level on record on July 17 the airline was shot down, killing 298 people. German 10-year bund yields were at 1.15% after closing at 1.149% on July 17, the lowest since Bloomberg began compiling the data in 1989.

“Markets are in wait-and-see mode,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. “There needs to be that incremental additional news flow to intensify the safe-haven bid.”

Volatility across asset classes has tumbled this year as central banks around the world pledged to keep interest rates lower for longer to support the economic recovery. Those same policies are also underpinning demand for fixed-income securities even as they stimulate growth.

Price Swings

Treasury market volatility was almost the lowest in a year at the end of last week. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, was at 54.41 basis points on July 18. It dropped to 52.74 basis points on June 30, the lowest since May 2013.

The shooting down of flight MH17 shouldn’t be used “to achieve selfish political aims,” Russia’s President Vladimir Putin said in a video posted on the Kremlin’s website.

Traders see a 62% chance the Fed will raise its key interest rate by July 2015, federal fund futures contracts show.

“Without that additional news flow do I want to buy that Treasury aggressively with 2.5% on the yield?” Davies said. “The U.S. economic backdrop has been improving, the data strengthening, the Fed is continuing with this policy normalization process and a rate hike is coming closer.”

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