Treasuries declined as easing political tensions in Ukraine and Gaza reduced demand for the safest assets before the U.S. sells $67 billion of notes and bonds this week.
Gains last week pushed 10-year yields (CBOT:ZNU14) to the lowest in more than a year, with the extra yield on the securities over the consumer-price index reaching the narrowest since April 2013 as geopolitical unrest fueled haven demand. The U.S. is due to sell $27 billion of three-year notes tomorrow, $24 billion of 10-year debt the next day and $16 billion of 30-year bonds on Aug. 14. German 10-year bunds fell today after the yield dropped to the lowest on record last week.
“The markets are a little red-faced for trying to overreact to” geopolitical events last week, said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The markets almost had to reverse course and move toward the sidelines a bit.”
The U.S. 10-year yield rose as much as two basis points, or 0.02 percentage point, to 2.44% before trading at 2.43% at 8:58 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5% note due May 2024 was 100 21/32. The yield dropped to 2.35% on Aug. 8, the lowest since June 2013.
The yield on German 10-year bunds increased one basis point to 1.06%, after falling last week to 1.023%. Australia’s 10-year yield jumped 13 basis points to 3.40%, after dropping 23 basis points in the final two days of last week.
The Bloomberg U.S. Treasury Bond Index climbed 3.8% this year through Aug. 8, recouping a 3.4% loss from 2013.
Treasuries gained with bunds as havens this month after violence grew in Gaza, Ukraine tried to dislodge pro-Russian separatists in the eastern part of the country and the U.S. conducted air strikes against Islamic State fighters in Iraq.
The biggest part of “the scare” is over, Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands, said in an interview. “There was a slight rebound in yields, although it’s not really euphoric. Overall there is still a lot of uncertainty” with yields “still at rather risk- averse” levels, he said.
U.S. 10-year yields will climb to 2.65% by the end of 2014 and increase to 3% a year from now, said Rabobank’s Marey. That’s less bearish than the 3.08% year-end prediction of analysts and strategists surveyed by Bloomberg, with the most recent forecasts given the heaviest weightings.
Treasuries have still underperformed stocks this year, with the MSCI All-Country World Index up 4.4% including reinvested dividends. The Stoxx Europe 600 Index of shares rose 1.2% today after declining 2.1% last week. The MSCI Asia Pacific Index gained 1.3%, the first increase in a week.
While U.S. economic growth rebounded last quarter from the biggest contraction in five years, inflation that has held in check helped lure investors to fixed-income securities.
U.S. consumer prices rose 2.1% in June from a year earlier, the Labor Department said on July 22. While the figure matched the highest level since October 2012, it’s less than the average of 2.4% for the past decade.
Wages are helping keep inflation from quickening. U.S. workers were paid an average $24.45 an hour in July, just one cent more than in the previous month, government data show.
Average hourly earnings increased 2% from a year earlier, failing to recover from the recession that began in December 2007 and ended in June 2009. The measure climbed as high as 3.6% in 2008.
Federal Reserve Vice Chairman Stanley Fischer said sluggish labor supply growth is a “source of concern” because it may contribute to a slowdown in longer-run output of the economy, which also faces a drag from housing and “broad based” slowing across emerging markets.
Falling labor-force participation largely reflects an aging population, though there’s “considerable uncertainty” about how much is due to the sluggish economy, Fischer said today in a speech in Stockholm. The participation rate, which measures the share of working-age people in the labor force, is 62.9%, near the lowest since 1978.
Economists predict U.S. reports this week will show retail sales rose in July and initial claims for jobless insurance increased last week, based on Bloomberg News surveys. Producer- price inflation slowed and industrial production accelerated, separate surveys show.
U.S. real yields have fallen more than 1 percentage point in 2014 as the annual inflation rate has increased from 1.5% at the end of 2013. Nominal yields, those that don’t account for inflation, slid about 60 basis points.
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