By Min Zeng
Government-bond yields slid to fresh lows, reflecting growing
investor unease over signs of a deepening slowdown in Europe.
European industrial-production data showed a
bigger-than-expected decline in August, and an index of economic
sentiment in Germany turned negative for the first time since late
2012. The U.K. reported that inflation in September slowed to the
lowest level since 2009.
The yield on the 10-year U.S. Treasury note fell to 2.206%, the
lowest closing level since June 2013. The 30-year bond's yield fell
to 2.957%, the first close below 3% in 17 months. The yield on the
10-year German government bond settled at a record low of 0.837%,
according to Tradeweb. Yields fall as prices rise.
Tuesday's gains extend an unexpected yearlong rally in safe
government bonds that has intensified this month, underscoring
ebbing hopes for a stronger global economy. The retreat of global
growth expectations has sent market-based gauges of inflation
expectations into free fall and sparked a collapse in global energy
prices, creating ripples through the stock market.
U.S. bond markets were closed on Monday for a federal holiday,
and traders and analysts said Tuesday's gains reflected in part
bond investors catching up to Monday's decline in stocks.
Christopher Sullivan, who oversees $2.4 billion as chief
investment officer at the United Nations Federal Credit Union, said
he bought Treasury bonds last week. He is concerned that weaker
growth in Europe will sap demand for U.S. exports.
Federal Reserve officials have become more concerned about weak
growth overseas and the impact of a strengthening U.S. dollar on
the domestic economy, according to minutes of the Fed's September
policy meeting released last week. The stronger U.S. dollar, by
reducing the cost of imported goods and services, could help hold
U.S. inflation below the Fed's 2% objective. Fed staff also cut
their projection for medium-term growth in part due to these
concerns.
"We are getting increasing comments from Fed officials about
domestic policy being impacted by overseas events," said Mary Ann
Hurley, vice president of trading in Seattle at D.A. Davidson &
Co.
Bond traders and investors have dialed back expectations for the
timing of the first interest-rate increase from both the Fed and
the Bank of England. Some investors now believe policy makers may
wait until the second half of 2015, if not longer, to raise
short-term interest rates.
Few investors expect the U.S. to slip into deflation, a cycle in
which falling consumer prices lead to spending reductions and
declining economic activity. Even in Europe, officials said the
risks of deflation are still limited.
But an inflation gauge closely watched by European Central Bank
President Mario Draghi fell Tuesday to the lowest in at least a
decade. The five-year/five-year inflation swap rate, which measures
investors' expectations for inflation in the eurozone over the
course of five years starting five years from now, fell to 1.77%,
according David Keeble, global head of interest-rates strategy at
Crédit Agricole in New York. It marks the lowest level since the
bank started tracking the data in 2004.
In the U.S., both the five-year and 10-year break-even rates
have fallen below the Fed's 2% inflation target. Tuesday, the
10-year break-even rate, or the yield spread between a 10-year
Treasury inflation-protected security and a 10-year Treasury note,
fell about 0.05 percentage point to 1.908 percentage points. That
suggests investors expect the U.S. inflation rate will average
1.908% within a decade.
The recent rally in bonds has compelled many analysts to lower
their rate forecasts. Bank of America Merrill Lynch became the
latest to do so Friday, cutting its year-end call on the 10-year
yield to 2.75% from the 3.1% earlier predicted. At the start of the
year, the bank's forecast was 3.75%. Goldman Sachs Group Inc. now
expects 3%, down from 3.25% predicted earlier this year. J.P.
Morgan Chase & Co. expects 2.7%, down from 3.65% at the start
of the year.
John Stopford, co-head of multi-asset at Investec Asset
Management, which manages $123 billion in global assets, said he
has bought Treasury bonds over the past two weeks but still expects
bond yields to rise, thanks to U.S. growth.
Write to Min Zeng at min.zeng@wsj.com