By Min Zeng
U.S. Treasury bonds strengthened Tuesday, capping the fifth
straight quarterly price gain that was the longest winning streak
in more than a decade.
The $12.5 trillion bond market continued to gain appeal among
investors who are grappling with an uncertain growth outlook
overseas and subdued inflation in the developed world. Mixed
economic readings in the U.S. amid a harsh winter in the East Coast
has bolstered investors' expectations that the Federal Reserve
would take its time in raising short-term interest rates that could
potentially shrink the value of outstanding bonds.
Adding to U.S. bonds' charm: they offer much more attractive
yields compared with government debt sold by Germany, Japan, the
U.K. and France, driven in a large part by unconventional monetary
stimulus from the European Central Bank.
"The yield differential between the U.S. and the rest of the
world continues to drive foreign buyers into Treasury bonds," said
Thomas Roth, executive director in the U.S. government bond trading
group at Mitsubishi UFJ Securities (USA) Inc. in New York.
"Domestic investors become convinced by Federal Reserve officials
that these low yields are here to stay."
Bond priced rose for the last trading session of the first
quarter as investors tweaked their portfolios to prepare for the
end of the first quarter. Fund managers also bought bonds to match
the month-end adjustments of their benchmark bond indexes.
In recent trading, the yield on the benchmark 10-year Treasury
note was 1.935%, compared with 1.959% on Monday, according to
Tradeweb. When bond prices rise, their yields fall.
The yield fell from 2.173% at the end of 2014. The last time the
yield fell for five quarters in a row was back in March 2001.
The Treasury bond market over all has handed investors a total
return--including price change and interest payments--of 1.48% this
year through Monday, following 5.05% return last year, according to
Barclays PLC.
But lower yields mean lower income. With yields near historical
lows, analysts have warned that if sentiment on the bond market
sours, bondholders are vulnerable to capital losses.
A sign of investors' hunger for income, some riskier bonds
outperformed Treasury debt. Bonds sold by lower-rated U.S.
companies posted a return of about 2.5% this year through Monday,
according to Barclays. U.S. investment-grade corporate bonds
returned 2.1%. Treasury inflation-protected securities returned
1.2% and municipal bonds returned 1%.
The mixed growth outlook has cast doubt over whether the Fed
could start raising short-term interest rates this June. Many
investors still see a very low probability for the Fed to raise
rates this summer.
The federal-funds futures, used by investors and traders to
place bets on central-bank policy, showed Tuesday that the market
sees a 6% likelihood of a rate increase in June, unchanged from
Monday, according to data from CME Group.
Fed Chairwoman Janet Yellen said Friday the timing hinges on how
the economy performs in the months ahead. She said the tightening
cycle this time would be gradual. The Fed last raised interest
rates in 2006. It has kept the fed-funds target rate near zero
since December 2008.
The nonfarm payrolls report for March due this Friday is the key
datapoint to shape up investors' expectations on the timing of the
first interest-rate increase by the Fed in nearly a decade. The
Fed's next policy meeting is set for April 28-29.
Economists polled by The Wall Street Journal expect the U.S.
economy to have added 248,000 new jobs in March, after a net gain
of 295,000 in February. The unemployment rate is expected to have
stayed unchanged at 5.5%.
"With the Fed getting closer to policy tightening, the bond
market is walking on pretty thin ice," said Mark Dowding, co-head
of investment-grade debt at BlueBay Asset Management, which manages
$62.8 billion of assets. "As long as the economy rebounds from its
first-quarter dip, yields are likely to be materially higher in the
next few months."
Larry Milstein, head of government and agency trading at R.W.
Pressprich & Co. in New York, said he doesn't anticipate "a
major move higher in yields" because higher U.S. bond yields remain
attractive to foreign buyers.
Bond strategists at Goldman Sachs Group Inc. now expect the
10-year Treasury yield to end this year at 2.5%, down from the 3%
the bank predicted at the start of the year.
Write to Min Zeng at min.zeng@wsj.com
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