By Min Zeng
Treasury bonds eked out slim price gains on Wednesday as
investors remain cautious over geopolitical risks.
The benchmark 10-year note rose for a third straight session
with its yield near the lowest point of the year.
In late afternoon trading, the benchmark 10-year note was 1/32
higher, yielding 2.464%, according to Tradeweb. Bond yields fall as
their prices rise.
The 10-year note's yield dipped to 2.4% during the May 29
session, the lowest intraday level since June 2013. The yield was
3% at the start of January.
Investors are keeping an eye on geopolitical tensions following
last week's downing of a Malaysia Airlines jetliner in Ukraine and
Israel's ground offensive in Gaza. For the moment, investors and
analysts believe the fallouts will be contained, but they caution
that a wider contagion could undercut the still uneven pace of the
global economy.
Larry Milstein, head of government and agency trading at R.W.
Pressprich & Co. in New York, said the 10-year note's yield
could retest 2.4% or fall below that level if flight to safety
demand accelerates. But he said bond prices could fall if "things
cool down in the Middle East and Ukraine."
Meanwhile, the Bank of England on Wednesday suggested in the
minutes of its recent policy meeting that it is in no rush to raise
interest rates. Officials fret that weak wage growth could leave
consumers vulnerable if borrowing costs rise too soon.
The latest signal that major central banks continue to take
their time in tightening monetary policy sent government bond
yields in both the U.K. and the U.S. lower. The 10-year U.K.
government bond's yield fell to 2.557%.
In the U.S., Federal Reserve Chairwoman Janet Yellen said last
month the central bank may need to keep interest rates low for a
considerable period to support the economy.
Wednesday, the International Monetary Fund cuts its forecast for
the U.S. economic growth this year, citing the sharp contraction
during the first quarter. The IMF expects the U.S. economy to grow
at 1.7% for 2014, down from 2% previously expected.
The Fed has held its policy rate, the fed-funds rate, near zero
since December 2008. Most economists expect the first rate increase
in the middle of 2015.
A report Tuesday suggested inflation in the U.S. isn't a big
threat to bond investors. The U.S. consumer-price index excluding
food and energy posted a 0.1% gain last month, half of what
economists had expected. The index rose 1.9% in June from a year
earlier, down from 2%--the Fed's inflation target--in May.
Inflation chips away bonds' value over time.
Lower bond yields in Germany and Japan have boosted the allure
of Treasury debt, one of the main factors sending Treasury yields
lower this year.
Wednesday, the 10-year German government bond yielded 1.147%.
The 10-year Japanese government bond yield was 0.53%.
This year's decline in Treasury yields has confounded traders
and market pundits calling for bond yields to rise this year.
Despite the setback, strategists at Goldman Sachs Group Inc.,
J.P. Morgan Chase & Co. and Morgan Stanley expect the 10-year
yield to rise to 3% by the end of the year. The key argument to
send yields higher is that the U.S. economy is gaining momentum
while inflation pressure continues to tick higher, factors that
could push the Fed to raise official interest rates earlier than
many investors expect.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 100 1/2 flat 0.476% flat
7/8% 3-year 99 25/32 up 1/32 0.952% -1.1BP
1 5/8% 5-year 99 28/32 up 1/32 1.650% -0.8BP
2 1/8% 7-year 100 2/32 flat 2.115% flat
2 1/2% 10-year 100 10/23 up 1/32 2.464% -0.8BP
3 3/8% 30-year 102 6/32 dn 4/32 3.260% +0.8BP
2-10-Yr Yield Spread: +198.8BPS Vs +198.6BPS
Source: Tradeweb
Write to Min Zeng at min.zeng@wsj.com