TREASURIES-Yields hit multiweek lows on US GDP data, month-end buying

30 May 2015 | Author: | No comments yet »

Treasuries Rise as U.S. Economic Contraction Clouds Fed Outlook.

Just when it looks like the yield on the 10-year U.S. government bond is ready to shoot up like a bottle rocket on the Fourth of July, it comes crashing down to earthly levels near historic lows.Treasuries rose, pushing the 10-year note yield to a three-week low, as revised data showed that the U.S. economy shrank in the first quarter, signaling that the Federal Reserve’s path to higher interest rates is uneven. While there were renewed signals from the central bank that it plans to raise interest rates this year, traders aren’t predicting more than one increase anytime soon and a Morgan Stanley index suggests policy makers won’t act until December.

Treasuries have expanded their yield premium to German government securities, adding to the allure for overseas investors. “Investors sense the rout the Treasury market suffered was mainly technical in nature and represents a fairly decent buying opportunity,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. But even with the Federal Reserve getting ready to pull the trigger on its first short-term interest rate increase since 2006, and pundits continually pointing out there’s no reason for bonds to be trading as if the world is coming to an end, bond investors keep buying U.S. government bonds — pushing yields down.

Money managers who benchmark their bond portfolios to indexes have to align their positions when new bonds are worked into those benchmarks at the close of each month. Aggregate index will extend its duration, which calculates how much prices change when yields rise or fall, by 0.12 year on June 1, compared with a 0.09 year increase in May. “A lot of people didn’t think the data was going to play too much of a factor,” said Edward Acton, a U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. “It might be more of a month-end extension story.” Gross domestic product in the U.S. shrank at a 0.7 percent annualized rate, revised from a previously reported 0.2 percent gain.

A swelling trade gap subtracted the most from growth in 30 years as the appreciating dollar caused exports to slump while imports rose following the resolution of labor disputes at West Coast ports. Bond investors look for U.S. economics to regain control of the market in June, as long as eurozone bonds remain calm and ongoing negotiations between Greece and its creditors don’t strike a nerve. But after the weak first-quarter performance, expectations have been pushed back to September and December, while some don’t even see a move until early 2016.

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