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Treasuries Rise on Relative Yield Value after ECB Cuts Forecasts

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Treasuries Rise on Relative Yield Value after ECB Cuts Forecasts

As the European Central Bank’s decision to delay additional stimulus increased the attractiveness of higher yielding US governmental debt with the potential for fast growth in Europe declining Treasuries rose for a second day.

Higher than comparable debt in 18 other developed nations, US 10-year yields were higher. There was a narrowing between yield on US five-year notes and 30-year debt to 1.37% points, the lowest since January of 2009.

Christopher Sullivan, chief investment officer with New York’s United Nations Federal Credit Union and who oversees $2.3 billion, said that some of the effects of suggestions made by Mario Draghi, President of the European Central Bank, are being seen. He added that more than likely, additional unconventional measures supportive of euro-area growth, as well as the reversal of severe disinflationary effects being seen now would occur.

Falling two basis points of 0.2% points to 2.26% were benchmark Treasury 10-year yields, this according to data from Bloomberg Bond Trader. Due in November 2024 is the price of 2.25% note, which was 99 28/32.

According to an announcement from the Treasury, $25 billion in three year notes, $21 billion in 10-year debt, and $13 billion in 30-year securities will be sold over a three day period beginning on December 9.

For Treasuries coming due in 10 years or more, there has been a return of 20% for 2014. For those due in five years or less, the return was 1.4%, as indicated on the Bloomberg US Treasury Bond index.

Specific to the Global Broad Market Sovereign Plus Index for Bank of America Merrill Lynch, bonds had an effective yield of 1.37%, which in October, fell 1.33% hitting the lowest point since May of last year. Nearly 1% higher than the global average were US Treasury yields, this during a time when the Federal Reserve prepares to hike interest rates.

Draghi said that monetary stimulus will be considered along with a pledge to assess the need early in 2015, a statement that disappointed some investors who want to see a quicker commitment.

Although forecasts for inflation and growth were significantly lower, Draghi told officials that he will wait to evaluate whether enough is being done to revive the weakest inflation reported in five years. Already, preparations are intensifying as to what more can be done, to include studying possible measures for buying government debt.

The 10-year bunds for Germany yielded 0.77% or 149 basis points less than Treasuries. In September, the spread expanded to 157, which was based on closing prices and the widest since 1999.

The US 10-year break-even point, which is used to measure inflation of expectations recording differences between yields on 10 year notes and similar maturity inflation indexed debt hit 1.8% percentage points, dropping to a low 1.78% points yesterday, the lowest recorded since 2011.

Analysts with Bloomberg News surveyed said in the year 2015, the US economy will grow 3% opposed to the 1.2% for the euro region and just 1% for Japan.

Last month, 230,000 jobs were added to the world’s largest economy, this compared to the 214,00 jobs in October. In a Bloomberg survey of economists prior to the government reporting figures tomorrow, said the unemployment rate stayed at 5.8%, a six-year low.

Thomas Tucci, managing director and head of Treasury trading at CIBC World Markets Corp. in New York stated that at this time, economic growth is relatively stable. He believes there will not be a major uplift in the funds rates because in looking at the situation from a growth and inflation standpoint it does not justify a serious tightening over an extended period of time.

As far as interest rates, the Federal Reserve kept them at the 0% to 0.25% since December 2008.

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Don Miller

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