By Min Zeng
U.S. government bonds strengthened Friday, capping the biggest
weekly rally in price in four months.
Investors piled into the world's most liquid bond market for
safety this week, sparked by fresh worries over the flagging
economic recovery in the euro zone and financial health of a major
bank in Portugal.
An additional boost for Treasury bonds came from the Federal
Reserve, which continued to signal patience before shifting into
raising interest rates. That indication came from the minutes of
its June policy meeting released Wednesday.
"The percolating stress in Europe helped fuel this week's rally
in bonds, " said Sean Simko, head of fixed-income management at SEI
Investments, which has $209 billion in assets under management.
"There is the growing view that a Fed rate hike may be further off
than initially thought."
In late afternoon trade, the benchmark 10-year Treasury note
rose by 3/32 in price, yielding 2.520%, according to Tradeweb.
Yields on bonds fall when prices rise.
The yield fell by about 0.12 percentage point for the week, the
most on a weekly basis since March. It has tumbled from 3% at the
start of the year.
This year through Thursday, Treasury bonds have handed investors
a total return of 2.63%, nearly eliminating the loss of 2.75% for
the whole year of 2013, according to data from Barclays PLC. Total
return include bond price appreciation and interest payments.
"The bond market has continued to frustrate those betting on
higher yields," said Mark Lindbloom, portfolio manager at Western
Asset Management Co., which has about $469 billion in assets under
management. He said U.S. bonds' yields are low, but "they don't
look that bad" compared with their counterparts in Germany and
Japan, which lured buyers seeking relative value in a low-yield
world.
Friday, the 10-year German government bond yielded 1.2% and the
10-year Japanese government bond yielded 0.53%.
Kevin Giddis, head of fixed income at Raymond James, said the
10-year Treasury yield could drop to 2.4%, which is this year's low
and was set on May 29, or lower if "there is a spread in the risks
of the [economic] recovery in Europe," or if the U.S. growth fails
to live up to market expectations, pushing the Fed to hold interest
rates low for longer than many expect.
Investors will zero in on Fed Chairwoman Janet Yellen's
semiannual testimony before lawmakers on the economy and
rate-policy outlook next week.
Ms. Yellen "is likely to maintain her dovish posture, further
signaling that policy tightening remains well beyond the end of
bond buying," said Christopher Sullivan, who oversees $2.3 billion
as chief investment officer at the United Nations Federal Credit
Union.
U.S. big banks still expect Treasury bond yields to rise in the
second half of the year.
Strategists at Goldman Sachs Group Inc., J.P. Morgan Chase &
Co. and Morgan Stanley expect the 10-year note's yield to rise to
3% by the end of the year to reflect the U.S. economy gaining
momentum while inflation pressure continues to tick higher.
Corrections & Amplifications
Yields on bonds fall when prices rise. An earlier version of
this article said bond yields fall when their yields rise.
Write to Min Zeng at min.zeng@wsj.com