By Min Zeng
Benchmark Treasury bonds pulled back on the final session of
March, capping a losing month. But debt prices rallied during the
first quarter.
Strengthening U.S. stocks on Monday sapped demand for haven
bonds as investors readjusted their bond portfolio at the end of
the quarter. The selling was kept in check by Federal Reserve
Chairwoman Janet Yellen, whose comments on Monday soothed concerns
over higher interest rates.
In late-afternoon trading, the benchmark 10-year note was 3/32
lower, yielding 2.723%, according to Tradeweb. Bond prices move
inversely to their yields.
The yield rose by about 0.07 percentage points in March.
For the quarter, it dropped 0.3 percentage points, the most on a
three-month basis since June 2012. The yield was 3.03% at the end
of last year, the highest level since July 2011.
The surprising drop in the yield this quarter was driven by
uncertainty over the global growth outlook. A slew of data from the
U.S. and China have been disappointing while stress in some
developing nations.
Analysts said upcoming U.S. economic releases will be key
factors for the direction of bond yields.
Tony Crescenzi, senior market strategist and portfolio manager
at Pacific Investment Management Co. in Newport Beach, Calif.,
which has $1.91 trillion assets under management, said bond yields
"would grind higher if the economy picks up speed in coming
months.
But he argues "2014 is not likely to be as disorderly as it was
during the turbulent period last summer mainly because investors
are more prepared now for rates to rise, having altered their
fixed-income allocations accordingly."
Investors will zero in on several U.S. data releases this week
in the manufacturing and service sectors and the labor market. The
key release, the nonfarm jobs report for March, is due Friday.
Economists expect the U.S. economy has added 200,000 jobs in March,
up from 175,000 in February.
Traders and analysts said bond yields will rise if the economy
is able to shake off the soft patch since January and inflation
rises, which would bring forward the timing for the Fed's first
interest-rate increase in years.
Without signs of the economy picking up speed or a persistent
rise in consumer prices, bond yields likely will continue to stay
in the current range for longer and even drop below 2.5% if the
economy falters, they said.
"We're still range-bound in the short term, with a slow bias
towards higher rates later in the year," said Guy LeBas, managing
director of fixed income strategy at Janney Montgomery Scott in
Philadelphia.
Mr. LeBas expects the 10-year yield to rise to 3.3% at the end
of December.
The 10-year yield rose over 1 percentage point last year, driven
by the prospect of reduced bond buying from the Fed.
Traders said shorter-dated Treasury bonds are more vulnerable to
selling this year, which would be a change from last year, when
longer-dated bonds took the brunt. They argue investor focus has
shifted away from reduced bond-buying from the Fed and toward when
the Fed will start raising short-term interest rates.
The bearish wagers on shorter-dated bonds might get hit if the
Fed continues to keep interest rates near zero for longer.
On Monday, shorter-dated Treasury bonds strengthened after Ms.
Yellen argued there is still substantial slack in the economy,
holding down inflation and giving room for the central bank to keep
interest rates lower for longer.
The two-year note was 1/32 higher on Monday, with its yield
sliding to 0.43%.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 99 28/32 up 1/32 0.430% -2.0 BP
3/4% 3-year 99 20/32 up 3/32 0.879% -2.9BP
1 1/2% 5-year 99 16/32 up 1/32 1.727% -0.8BP
2 3/8% 7-year 99 22/32 flat 2.299% flat
2 3/4% 10-year 100 7/32 dn 3/32 2.723% +1.1BP
3 3/4% 30-year 101 5/32 dn 10/32 3.562% +1.8BP
2-10-Yr Yield Spread: +229.3 BPS Vs +226.2 BP
Source: Tradeweb
Write to Min Zeng at min.zeng@wsj.com
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