... and folks are seeking false safety ...
quote.bloomberg.com
07/26 16:59
Treasuries Rise as Investors Seek a Haven From Stock Swings
By Elizabeth Stanton
New York, July 26 (Bloomberg) -- U.S. Treasuries rose for a third week as stock indexes alternated between gains and losses, driving investors to the stability of government debt.
The benchmark 10-year Treasury note has returned 10 percent including reinvested interest since the end of March. Its yield, at an eight-month low of 4.38 percent, has plunged more than 1 percentage point since then.
``I could see 10-year rates drifting as much as 50 basis points lower'' because investors remained concerned about the stock market, said Gary Pzegeo, who helps manage $5 billion at Gannett Welsh & Kotler in Boston. ``The equity market is center stage.''
The 4 7/8 percent note due in 2012 jumped almost 1 1/8 this week to a price of 103 26/32. Its yield slid 14 basis points as falling stocks cast doubt on the strength of the economic recovery and led traders to increase bets the Federal Reserve will cut its overnight lending rate next month.
Benchmark 10-year note prices were unchanged today, while the 2 1/4 percent 2004 note gained 1/16 to 100 1/16 as its yield dropped 4 basis points to 2.22 percent.
The Standard & Poor's 500 Index climbed 1.7 percent today. It rose 0.6 percent in the past five day, marking its second week of gains out of the past 10. Treasuries briefly advanced after a report, later denied by the Defense Department, that U.S. soldiers were attacked in Afghanistan.
Government debt has surged this year as the S&P 500 lost more than a quarter of its value and the Nasdaq Composite Index shed more than a third, boosting the appeal of fixed-rate government debt.
Money Flows
Two- and five-year note yields fell to all-time lows, based on closing values. Two days ago, the two-year yield dropped as low as 2.02 percent before closing at 2.30 percent. The five-year note, yielding 3.39 percent, dropped to 3.32 percent two days ago and closed at 3.52 percent.
Investor purchases of bond and money-market fund shares have propelled the rally in Treasuries, said Tom Hagstrom, head of fixed-income trading at State Street Research & Management in Boston, which oversees $25 billion in bonds.
``Our mutual fund flows dictate that we put money to work,'' Hagstrom said. ``Even if we think rates are low, we're not making asset-allocation decisions for our clients, they're making them for themselves.''
Investors pumped $3.24 billion into U.S. government bond funds in the week ended July 22, while they pulled $16.5 billion from stock funds.
Corporate Borrowers
State Street Research has been selling Treasuries maturing in 13 or more years and buying five-year notes on expectations yields will rise as the economy recovers, Hagstrom said.
Money managers are buying more Treasuries than they otherwise might because rising interest rates for corporate borrowers have kept many from issuing new bonds, Hagstrom said.
Corporate borrowers have sold $13.8 billion of new bonds in July, compared with an average of $48.8 billion in the previous three months. Investment-grade bonds trade at an average premium over Treasuries of 2.31 percentage points, the widest gap since Merrill Lynch & Co. began keeping records in June 1992.
A University Michigan survey showing consumer confidence declined less in July than previously estimated curbed demand for Treasuries. The report suggested consumers, whose spending accounts for two-thirds of economic activity, may continue to drive growth, analysts said.
Confidence
Even so, the final consumer sentiment index for July dropped to 88.1 from 92.4 in June. Economists polled by Bloomberg News expected an unchanged reading of 86.5.
Treasuries may extend gains as declining confidence foreshadows slower growth and lower interest rates as consumers cut their budgets.
Sluggish spending might prompt the Federal Reserve to cut short-term interest rates from a 40-year low, said Todd Finkelstein, who helps manage $1.3 billion at Boston Advisors Inc. in Boston.
``The Fed will need time to determine whether the consumer has been shocked by the equity market collapse and whether that manifests itself in a change in consumer spending,'' said Finkelstein, who said the 10-year note yield may drop 20 to 25 basis points from its current level.
Three months ago, traders had bet the Fed would raise its 1.75 percent overnight interbank lending rate by a quarter-point at policy makers' Aug. 13 meeting. Today, federal funds futures trading suggests traders see about a 40 percent chance the central bank will cut the target a quarter point.
The yield on the fed funds futures August contract fell half a basis point to 1.695 percent. On April 23, it yielded 2.02 percent. The contract is a gauge of what traders expect the average overnight rate to be in a particular month. |
