Treasuries on the rise

January 5, 2015 10:18 AM

Treasuries rose, pushing the 30-year bond yield to the lowest level in more than two years, as global inflation slowed even as the Federal Reserve is on track to raise rates this year.

The difference between yields on two-year notes and 30-year bonds, known as the yield curve, narrowed to the least since January 2009 as brent crude oil fell below $55 a barrel for the first time since May 2009. German inflation slowed to the weakest in more than five years in a sign that euro-area prices have started to decline. The chances of a Fed interest-rate increase by its September meeting was at 65 percent.

“The Fed may be optimistic about inflation, but they are getting lonelier in that view,” said Jim Vogel, head of agency- debt research at FTN Financial in Memphis, Tennessee. “It’s the Fed’s current willingness to ignore the inflation downdraft.”

Thirty-year bond yields dropped four basis points, or 0.04 percentage point, to 2.66 percent at 9:09 a.m. New York time, according to Bloomberg Bond Trader data. The 3 percent securities maturing in November 2044 added 25/32, or $7.81 per $1,000 face amount, to 107 1/8. The yield reached the lowest level since September 2012.

The difference between the yields on two-year notes and 30- year bonds touched 197 basis points, the lowest since January 2009.


Global Bonds

A gauge of global bond yields approached the all-time low of 1.29 percent as investors sought the safety of government debt.

Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.30 percent on Jan. 2. The low was set in 2013 based on data going back to 1996. Yields in countries from Australia and Japan to Germany, France and Ireland have fallen to records.

Bonds are rallying, pushing borrowing costs lower, and the euro is sliding on speculation the European Central Bank is about to start buying the region’s government debt to stave off deflation.

The inflation rate in Germany, the region’s largest economy, fell to 0.1 percent in December from 0.5 percent in November, the Federal Statistics office in Wiesbaden said today.


Yield Levels

ECB President Mario Draghi said in an interview with German newspaper Handelsblatt published last week that while deflation risks are “limited,” policy makers “have to act against such risk.” Quantitative easing is the term for central-bank bond- buying programs that put downward pressure on borrowing costs and pump currency into the economy.

The Bank of Japan increased its QE program last year, while the Fed stopped buying bonds.

Greece’s political parties embarked on a campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country’s membership in the euro currency area.

Brent for February settlement declined as much as $4.08 to $54.12 a barrel on the London-based ICE Futures Europe exchange in London, the lowest since May 2009.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 1.68 percentage points. The average for the past decade is 2.18.


Fed Watch

The chances of a Fed interest-rate increase by its September 2015 meeting increased from 53 percent on Dec. 16, the day before the Federal Open Market Committee issued its policy statement, according to futures data

“The Fed is likely to raise interest rates later this year, but the impact on bond yields need not be significant,” said Nick Stamenkovic, fixed-income strategist at broker RIA Capital Markets in Edinburgh. “With the world facing disinflation, and central banks in Japan and the euro zone likely to buy more bonds, any increases in yields should be limited.”

Economists predict the U.S. 10-year yield will rise to 3.06 percent by end of 2015, according to a Bloomberg News survey with the most recent forecasts given the heaviest weightings.

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