By Min Zeng
Investors piled into U.S. government bonds on Wednesday, sending
the benchmark 10-year yield to a fresh 20-month low, after the
Federal Reserve continued to signal patience in raising borrowing
costs for the broader economy.
Growing market turmoil in Greece added to the haven allure of
U.S. Treasury bonds. The yield on the 30-year bond closed at a
record low.
The yield on the benchmark 10-year note fell to 1.723% from
1.825% on Tuesday. It marks the lowest closing level since May
2013. The yield has tumbled from 2.173% at the end of 2014. Bond
prices rise as their yields fall.
The 30-year yield settled at 2.294%, breaking the previous
record closing low of 2.391% made on Jan. 23.
Robust demand for U.S. bonds underscored concerns about the
uncertain global growth outlook and deflation risks in Europe. As a
nod to global uncertainty, the Fed said in a statement Wednesday
that it will remain patient in raising interest rates. The Fed said
the U.S. economy was expanding at a solid pace, but it signaled
that short-term interest rates were likely to remain near zero at
least until midyear.
"The bond market welcomed the Fed's re-assertion that they
remain patient and a rate increase is still months away," said
Christopher Sullivan, who oversees $2.45 billion as chief
investment officer at the United Nations Federal Credit Union in
New York.
Fed-funds futures, which are used to place bets on central-bank
policy, showed Wednesday that investors and traders see a 12%
likelihood of a rate increase at the June Fed policy meeting,
according to data from CME Group Inc. It was 18% before the Fed
statement. The odds were 26% a month ago.
A $26 billion sale of two-year Treasury notes on Wednesday drew
the strongest demand since December 2013, a sign buyers expect the
Fed will be slow in shifting to a tighter monetary policy. Higher
interest rates from the central bank will erode the value of
outstanding bonds.
"Yields have room to go lower," said Todd Hedtke, vice president
of investment management for Allianz Investment Management, which
manages over $600 billion in assets globally. "U.S. bonds remain
attractive compared to bonds overseas and the Fed is not in a hurry
to raise rates."
Investors fled Greece's stocks and bonds on Wednesday. Stocks of
Greek banks tumbled. Greece's new government, which emerged from
Sunday's elections, is pushing for renegotiation with international
creditors of the harsh terms imposed on Greece for the 240 billion
euro ($271.6 billion) financial bailout between 2010 and 2012.
Investors are concerned that the showdown may lead to a default
by Greece or even an exit by the nation from the eurozone. Analysts
said the risk of Greece departing the monetary union remains small,
but the uncertainty is driving investors to move capital from
Greece's banks and the nation's financial markets.
"There are fears on Greece," said Thomas Roth, executive
director in the U.S. government-bond trading group at Mitsubishi
UFJ Securities (USA) Inc. in New York. "Anything can happen given
the new regime."
The yield on the 10-year Greek government bond on Wednesday
soared 0.9 percentage point to 10.7%. The yield remains way below
the record high of over 40% in March 2012 when fears over a breakup
of the eurozone escalated.
So far, the spillover into government-bond markets in other
eurozone countries has been moderate, reflecting a view that firm
monetary-policy support from the European Central Bank will keep
contagion in check.
Bond yields in Spain, Italy, Portugal and Ireland all rose
Wednesday, after hitting record lows last week following the ECB's
announcement that it will start buying bonds, including eurozone
sovereign debt, in March.
"The European banks do not own any Greek debt and this was the
main source of spillover" in 2012, said David Keeble, global head
of interest-rates strategy at Credit Agricole in New York. "The
belief is that the ECB's monetary policy will ringfence contagion
risks."
COUPON ISSUE PRICE CHANGE YIELD CHANGE
5/8% 2-year 100 9/32 up 2/32 0.478% -3.2BP
7/8% 3-year 100 6/32 up 5/32 0.808% -5.9BP
1 5/8% 5-year 101 26/32 up 14/32 1.242% -9.2BP
2 1/8% 7-year 103 29/32 up 21/32 1.528% -9.9BP
2 1/4% 10-year 104 23/32 up 30/32 1.723% -10.2BP
3% 30-year 115 6/32 UP 2 16/32 2.294% -10.5BP
2-10-Yr Yield Spread: +124.5BPS +131.0BPS
Source: Tradeweb/WSJ Market Data Group
-- Write to Min Zeng at min.zeng@wsj.com