Safe havens are the place to be

Treasury 10-year notes rose for a second day as the crisis in Ukraine and evidence the global economic recovery is faltering boosted haven assets from the U.S. to Germany.

Treasuries (CBOT:ZNU14) pared gains as initial claims for U.S. jobless benefits unexpectedly fell last week. German two-year yields fell below zero for the first time since May 2013, and Australia’s securities jumped after unemployment surged to a 12-year high.

The gains helped make U.S. government debt the most expensive versus stocks in two months amid speculation demand for equities will wane as the Federal Reserve cuts its stimulus. The world’s largest economy expanded more than analysts predicted in the second quarter, a report showed last week.

“The market is opening up with a strong bid in reaction to bunds,” said Craig Collins, managing director of rates trading at Bank of Montreal in London, referring to German bonds. “The geopolitical situation is outweighing the better data we saw in the middle of last week. We’ll have to see a continuation of stronger data to get” 10-year rates above 2.5%, he said.

The U.S. 10-year yield declined less than one basis point, or 0.01 percentage point, to 2.47% at 8:32 a.m. New York time, according to Bloomberg Bond Trader data, after earlier dropping three basis points. It fell to 2.43% yesterday, the lowest since May 29. The 2.5% note maturing in May 2024 rose 1/32, or 31 cents per $1,000 face amount, to 100 9/32 today.

Australia’s 10-year yield dropped nine basis points to 3.42%, the biggest decline in more than four months. The jobless rate climbed to 6.4% last month, the statistics bureau said in Sydney today.
 

Haven Demand
 

Tensions in Ukraine and Gaza have helped drive demand for the safest assets in the past month.

Russia has banned imports of an array of food goods from the U.S., Canada, Australia and Europe. The restrictions include all cheese, fish, beef, pork, fruit, vegetables and dairy products, Prime Minister Dmitry Medvedev said today. The country is embroiled in the worst standoff with the U.S. and its allies since the Cold War over Ukraine, where government troops are cracking down on pro-Russian separatist strongholds in the east.

Israeli and Palestinian officials are observing a 72-hour truce in Gaza after Israel withdrew troops on Aug. 5 following four weeks of fighting.
 

Beating Stocks
 

Treasuries have outperformed equities on speculation demand for stocks will wane as the U.S. central bank reduces the amount of cash it pumps into the economy.

Data on July 30 showed the U.S. economy grew at a 4% annualized rate in the second quarter, after shrinking 2.1% from January through March. The U.S. added more than 200,000 jobs for a sixth month in July.

U.S. jobless claims decreased by 14,000 to 289,000 in the week ended Aug. 2 from 303,000 in the prior period, a Labor Department report showed today in Washington. The median forecast of 47 economists surveyed by Bloomberg called for an increase to 304,000.

The Fed has cut its purchases of government and mortgage bonds, its tools for quantitative easing, six times, bringing the amount to $25 billion a month from $85 billion.

U.S. 10-year notes yielded 50 basis points more than the Standard & Poor’s 500 Index (CME:SPU14) dividend yield yesterday, the smallest premium since May 28, signaling an increase in the relative price of Treasuries.

“There’s a decent possibility that the yield is going to go down further” in the Treasuries market, said Yusuke Ito, a bond investor at Mizuho Asset Management Co., which has the equivalent of $39.2 billion in assets. “The Fed is going to stop the QE program. There was a tremendous amount of liquidity provided by quantitative easing that went to stocks or high-yield assets.”
 

German Yields
 

The S&P 500 Index dropped 3.1% including reinvested dividends during the last month, trimming this year’s gains to 5.1%, the data show.

The Bloomberg U.S. Treasury Bond Index returned 1% in the month through yesterday, and is up 3.6% this year, according to data compiled by Bloomberg.

The European Central Bank kept interest rates unchanged at record lows. The 24-member Governing Council meeting in Frankfurt left the main refinancing rate at 0.15%, as predicted by all 57 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate remained at minus 0.1% and 0.4

German 10-year yields dropped to a record-low 1.078% today, while two-year rates reached minus 0.004%.

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