Yields for long-dated government bonds in the United States and Germany hit fresh lows for 2014 due to strong demand for haven assets.
Anxiety specific to the outlook of the global economy increased because of dropping oil prices and political uncertainty in Greed. As a result, investors were driven to sell off US stocks and purchase government bonds deemed safer.
The yield on the 30-year Treasury bond in the US declined to 2.835%, hitting its lowest mark since May of last year. Also falling to 2.169% was yield on the benchmark 10-year Treasury not, another low since October 16 of 2014. Then for yield on the government bond for Germany, this declined to 0.681%, reaching a record low. As prices rise, yields fall.
For three sessions, the Treasury bond market has experienced some strengthening, this as sentiment of investors were jolted on several disappointing releasing come out of the Eurozone, Japan, and China. Also causing concern for investors is new turmoil pertaining to Greece’s political situation and China trying to control growing risks specific to the country’s heavy debt financial system.
Since last summer, the selloff of crude oil has only intensified analysts’ outlook. In yesterday’s trading, US crude oil dropped over 4%, hitting a new low in more than five years. Typically, investors like lower inflation since it preserves asset value and officials around the world are extremely cautious when it comes to deflation. This cycle of declining prices and lower spending is damaging and has potential to restrict economic growth.
Investors continue to keep a careful watch over the Federal Reserve Bank’s next week’s monetary policy meeting. Because employment in the United States is gaining momentum, officials with the Federal Reserve are giving serious consideration to eliminating an assurance that short-term interest rates will remain around zero for what they say is a “consideration time”. It appears that officials are looking to increase rates somewhere near the middle of 2015.
Christopher Sullivan, chief investment officer at New York-based United Nations Federal Credit Union and who oversees $2.4 billion, said that all the developments have raised numerous uncertainties that should be dealt with by paring risk. He added that the US Treasury bond market benefited from the risk of trade.
As for the bond market in Greece, this was still selling off in recent trading. The 10-year government debt yield for the country jumped close to 0.6% point to 8.693%, this after a percentage point increase the prior day of 0.8.
Bond selling in Greece affected government bonds in additional weak economies within the Eurozone. In addition, Italy, Portugal, and Spain’s yields all increased although not significantly. Containing price weakness were expectations that the European Central Bank (ECB) would add more monetary stimulus in order to support a struggling economy.
Since the start of 2014, yield for the 10-year Treasury note dropped from 3%, this as the US economy gained traction and that in October, the Federal Reserve ended the monthly bond buying program, which would made buying haven debt less appealing.
In recent months, both the Bank of Japan and the ECB boosted monetary stimulus. In Japan and the Eurozone, liquidity pushed bond yields down to extremely low levels. As a result, foreign buyers found higher yielding bonds in the US more attractive. Adding to the intrigue for US financial assets is the rising dollar.
James Sarni, senior managing partner at Los Angeles Payden & Rygel and who manages roughly $85 billion, said that slack in the market created by the bond buying program being ended by the Federal Reserve could have been taken up by the ECB. He added that as far as global demand for US bonds, this will probably continue and even increase.
Drawing the strongest foreign demand since December 2011 was Wednesday’s $21 billion sale of 10-year Treasury notes. The results of the auction also gave an additional boost to the bond market.
As stated by Kevin Giddis, head of fixed income at Raymond James in Tennessee, the combined conditions that would support a good auction are currently in place to include demand for safe haven, anticipated low inflation, and outstanding yields on sovereign credit.
Investors’ fixed returns are slowly being chipped away at by inflation with the primary threat being the value of Treasury debt scheduled to mature within the next 10 to 30 years.
Overall, Treasury bonds posted a total return of 4.7% for 2014, to include interest payments and price changes. For Treasury bonds set to mature in over 25 years, the return posted was 24.8%.
Due Thursday is a $13 billion sale of 30-year Treasury bonds, being the last of the US bonds supply and government notes for this week.