Tags: Treasurys | Rally | Slowing | Growth

Treasurys Rally Amid Signs of Slowing Growth

Wednesday, 01 October 2014 05:55 PM

Prices of U.S. Treasury securities gained the most in more than eight months Wednesday as yields higher relative to most Group of Seven nations increased demand from investors worldwide concerned that global growth may be stalling.

Benchmark 10-year notes yielded almost the most versus their German counterparts since 1999 after the dollar touched a two-year high versus the euro Tuesday. The European Central Bank may detail its plan to buy asset-backed securities Thursday amid slowdowns in Germany in France. Stocks tumbled, pushing the Russell 2000 Index into a correction, and bolstering the haven appeal of U.S. government securities.

“We have this quest for growth and central banks are unable to produce it,” said Richard Gilhooly, an interest-rate strategist in New York at TD Securities Inc., one of 22 primary dealers that trade with the Federal Reserve. “We have a global deflationary situation developing.”

The U.S. 10-year yield fell 10 basis points, or 0.10 percentage point, to 2.39 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. It was the biggest drop since Jan. 23. The 2.375 percent security rose 29/32, or $9.06 per $1,000 face amount, to 99 28/32.

U.S. 10-year notes yielded 1.48 percentage points more than their German counterparts after reaching 1.57 on Sept. 17, the most since June 1999. They were 1.85 percentage points higher than those of Japanese peers, up from 0.63 percentage point in May 2012.

Gross Aftershocks

The Pimco Total Return Fund, managed by Bill Gross until this week, suffered an estimated $23.5 billion of withdrawals last month, its worst month ever. Pacific Investment Management Co. provided the estimate in an e-mailed statement.

Gross’s departure from Pimco sparked selloffs in some of his biggest wagers, such as inflation-protected U.S. government bonds, and some less-traded ones are still feeling the effects amid speculation the company may need to sell to raise cash to cover potential investor redemptions.

“There’s a real lack of liquidity on the corporate bond side, and that’s driving people into Treasurys,” said Mary Kane, a money manager at Gannett Welsh & Kotler LLC in Boston. “It will persist a little while.”

Banks are less willing to cushion big swings using their own balance sheets and Gross’s exit shows just how little it takes to move the needle in the $42 trillion global bond market, which has ballooned by 48 percent since 2008.

Futures Spike

Gains in Treasurys were boosted by large trades in the futures market. As the price on the 10-year Treasury note futures traded on the CME Group Inc. exchange increased during the 8:20 a.m.-to-8:22 a.m. period, almost 40,000 contracts traded, according to exchange data tracked by Bloomberg.

The futures price moved from 124 29.5/32s at 8:19 a.m. to 125 3/32s at 8:22 a.m. At least 1.8 million contracts have traded hands, compared with Tuesday’s total volume of 1.4 million.

“There is massive short covering that has caught a lot of people off guard,” said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York. “The move doesn’t feel like it’s dissipating. It’s a very surprising move given the data we have ahead of us.”

Treasury yields have gained versus bunds for a record nine quarters as the ECB unveiled a series of stimulus measures to boost credit lending and combat the threat of deflation.

The dollar gained to $1.2571 per euro yesterday, the strongest since August 2012, and traded at $1.2619 Wednesday after a purchasing managers index of manufacturing in Germany, the euro area’s largest economy, fell to 49.9 last month, according to London-based Markit Economics. That’s the lowest level since June 2013 and below the 50 level that indicates expansion. France’s PMI fell to 49.1 from 49.5 in August.

‘Look Cheap’

Last month, the ECB cut interest rates to record lows and pledged to purchase asset-backed securities and covered bonds. The asset-purchase plan is part of a strategy intended to add as much as 1 trillion euros to the central bank’s balance sheet.

“That our yields are better than Germany and Japan makes us look cheap -- and we’re seeing the benefit of people with excess reserves moving into Treasurys,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.

U.S. benchmark 10-year notes dropped in September by the most this year on bets the Fed is preparing to raise interest rates in 2015.

Fed policy makers in September boosted their median estimate for the benchmark interest rate for the end of 2015 to 1.375 percent, compared with 1.125 percent in June. They have kept their target for the rate, which banks charge each other on overnight loans, close to zero since December 2008.

The Institute for Supply Management’s index dropped to 56.6 from 59 in August, figures from the Tempe, Arizona-based group showed Wednesday, even as the gauge’s average over the past three months was the highest since early 2011. A report Friday may show U.S. payrolls jumped by 215,000 last month, up from 142,000 in August.

Treasurys dropped 0.6 percent in September, the biggest decline since they slid 1.1 percent in December, based on the Bloomberg U.S. Treasury Bond Index.

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Prices of U.S. Treasury securities gained the most in more than eight months Wednesday, as yields higher relative to most Group of Seven nations increased demand from investors worldwide concerned that global growth may be stalling.
Treasurys, Rally, Slowing, Growth
Wednesday, 01 October 2014 05:55 PM
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