By Min Zeng
The yield on benchmark U.S. government bonds tumbled to the
lowest level since May 2013 on Friday as global-growth worries
struck close to home.
Investors sought the relative safety of Treasurys after a report
showed slower-than-expected fourth-quarter growth in the U.S. The
slowdown in the U.S. cast doubt on the ability of the world's
largest economy to withstand the headwinds from sluggish growth in
Europe and Asia. Adding to the anxiety is a constellation of
factors including political turmoil in Greece and renewed signs of
instability in Russia's currency.
Although it's still the early days of 2015, the sustained rally
in Treasurys is defying the expectations of many Wall Street
strategists for a rise in bond yields this year. Bond yields fall
when prices rise.
For January, Treasurys are on track to post their biggest
one-month gain since August 2011.
"A slowdown in global and domestic economies will continue to
fuel the Treasury bond rally," said Sean Simko, head of
fixed-income management at SEI Investments in Oaks, Pa., which has
$249 billion in assets under management. "The 10-year Treasury
yield could continue its move into uncharted territory if the
growth outlook deteriorates."
The scramble for a haven early Friday sent the yield on the
10-year Treasury note down to 1.651%, according to data provider
Tradeweb. That's the lowest intraday level since May 2013, when the
yield hit 1.618%.
Recently, the yield on the benchmark 10-year Treasury note was
1.668%, compared with 1.755% Wednesday, according to Tradeweb. The
yield has tumbled from 2.173% at the end of 2014.
Other haven assets also rose against a backdrop of selling of
riskier assets. Gold jumped 1.4% and the Japanese yen strengthened
against the dollar. The Dow industrials recently were down 160
points, or 0.9%, at 17256.
U.S. gross domestic product expanded at a 2.6% annual rate in
the fourth quarter, the Commerce Department said Friday. Not only
was that half the 5% pace of expansion in the third quarter, it
fell short of the 3.2% rate of growth forecast by economists
surveyed by The Wall Street Journal.
While U.S. indicators, especially of the labor market, have
largely been rosy, some readings are prompting investors to
reassess the resilience of the U.S. economy. The disappointing GDP
report follows Tuesday's weak reading on durable-goods orders.
Across the Atlantic on Tuesday, Russia's central bank cut
interest rates unexpectedly, fueling a selloff in the ruble. The
eurozone's annual inflation rate fell by 0.6% in January, the
biggest decline since July 2009, adding to worries about deflation.
Falling prices could cause consumers to hold back on purchases in
anticipation of even lower prices in the future, potentially
creating a cycle that could damage the economy.
Helping to fuel the four-month rally in the Treasury market is
the European Central Bank, which last week announced a massive
bond-purchase program in a bid to shore up growth on the
Continent.
Investors snapped up eurozone government bonds in anticipation
of the program, driving yields to record lows in many countries.
That bolstered the allure of Treasurys and other developed-country
government bonds, as investors clamored for the higher yields
outside the eurozone.
On Friday, the yield on the 10-year German government bond fell
to 0.304%, falling below the closing record low of 0.32% set on
Jan. 23. The yield on the 10-year U.K. government bond fell to a
record low of 1.333%, according to Tradeweb.
Treasury bonds have posted a total return--including price
changes and interest payments--of 2.19% this year through Thursday,
the best monthly performance so far since August 2011, according to
data from Barclays PLC. The return was 5.05% in 2014.
Lower Treasury yields could be a boon for the U.S. housing
market as they push down mortgage rates. Companies also benefit by
locking in favorable borrowing costs when selling new debt.
But lower yields mean investors have to make do with less
income, pushing many toward riskier bonds with higher yields. Some
investors caution that bond buyers may be vulnerable if sentiment
sours, as slim yields offer a thin layer of protection against the
risk of capital losses.
"There is little margin for errors with yields so low," said
David Keeble, global head of interest-rates strategy at Crédit
Agricole in New York. "Any change in sentiment on the eurozone's
growth or inflation outlook, U.S. bond yields could see a rapid
pace of increase."
Others continue to believe bond yields have room to fall, at
least in the short term.
Todd Hedtke, vice president of investment management for Allianz
Investment Management, which manages over $600 billion in assets
globally, said U.S. bonds "remain attractive" in a low-yield
world.
"We are still buyers of Treasury bonds," said Mr. Hedtke. He
declined to offer an exact forecast but didn't rule out the 10-year
yield falling below 1.5%.
The 10-year U.S. bond yield closed at a record low of 1.404% in
July 2012 when global financial markets were roiled by the eurozone
sovereign-debt crisis.
Investors expect the Federal Reserve will continue to be patient
in raising benchmark interest rates amid an uncertain outlook, a
situation that's beneficial for bonds.
Fed-funds futures, which are used to place bets on central-bank
policy, showed Friday that investors and traders see an 11%
likelihood of a rate increase at the June Fed policy meeting,
according to data from CME Group Inc. The odds were 14% before
Friday's U.S. data and 26% a month ago.
"What's the rush?" said David Ader, head of government bond
strategy at CRT Capital Group LLC. The Fed "won't raise rates until
2016."
Write to Min Zeng at min.zeng@wsj.com
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