By Min Zeng
Investors piled into government bond markets in the U.S.,
Germany and the U.K. on Tuesday as geopolitical worries boosted
demand for haven assets.
The buying sent the yield on the 10-year German government bond
to a record low. The yield on the U.S. 10-year Treasury note
approached the lowest level of 2014.
In late afternoon trading, the benchmark 10-year Treasury note
was 8/32 higher, yielding 2.462%, according to Tradeweb. Bond
yields fall as their prices rise.
The yield on the 10-year German government bond fell to 1.12%.
The yield on the 10-year U.K. government bond dropped to
2.547%.
Investors are keeping an eye on fallout from the latest
sanctions against Russia from the West on Tuesday.
The European Union's sanctions for the first time target sectors
of Russia's economy, including its state-controlled banks and its
oil industry. The sanctions remain tightly focused because the EU
wants to give Russian President Vladimir Putin a chance to stop his
alleged support of rebel groups in eastern Ukraine.
"It is flight for safety," said Mary Ann Hurley, vice president
of trading in Seattle at D.A. Davidson & Co. "The EU sanctions
will not only hurt Russia, they will hurt the EU, particularly
Germany, hard" given the close trading relationship between Russia
and Germany.
U.S. government bonds offer superior yields compared with their
German counterparts, drawing investors for relative value. This has
been one of the main factors sending Treasury yields lower this
year.
"The reality is that the Treasury market and the Bund market are
the primary assets that investors use for safe-haven buying, so
rallying Bunds make Treasurys look more attractive in comparison
and bring buyers into the Treasury market," said Larry Milstein,
head of government and agency trading at R.W. Pressprich & Co.
in New York.
Treasury bonds got an additional boost Tuesday from strong
demand at a sale of $35 billion in five-year notes.
The new five-year notes were sold at a yield of 1.72%. Overall
demand rose to the highest since March. The direct bid, which
includes buying from U.S. investment firms and depository
institutions, climbed to 25.9%, the highest level since December
2012.
The 10-year Treasury yield fell to 2.40% on May 29, marking the
low for 2014 and the lowest level since June 2013. The yield was at
3% at the start of the year.
The bond market briefly pared its price gains earlier Tuesday on
an upbeat U.S. consumer-confidence report.
The Conference Board, a private research group, said its index
of consumer confidence rose to 90.9 in July from a revised 86.4 in
June. The July reading is the highest since October 2007, before
the recession.
German government bond yields have fallen this year as the
European Central Bank slashed official interest rates to a record
low to support the euro zone's flagging economic recovery.
Investors and economists expect the ECB to add more monetary
stimulus this year to prevent slowing inflation from turning into
deflation--a persistent decline in consumer prices that would
discourage consumer and business spending.
The prospect of more easy policy from the central bank has
sparked a broad price rally in euro-zone government bond markets
this year, sending yields to very low levels.
In the U.S., the Federal Open Market Committee started its
two-day policy meeting Tuesday. It is scheduled to release a
statement Wednesday afternoon containing its latest assessments on
the economy and inflation, as well as its interest-rate policy.
Economists widely expect the Fed to announce another $10 billion
reduction in its monthly bond purchases, shrinking them to $25
billion a month.
The Fed has been cutting its monthly buying since January.
Policy makers have said the program--which has played a big role in
keeping bond yields near historic lows to stimulate the
economy--will likely end before the end of October.
A particular focus for bond investors is when the Fed is going
to start raising its official interest rates.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 99 29/32 flat 0.542% flat
7/8% 3-year 99 22/32 up 1/32 0.982% -0.8BP
1 5/8% 5-year 99 23/32 up 2/32 1.686% -1.7BP
2 1/8% 7-year 99 31/32 up 5/32 2.130% -2.7BP
2 1/2% 10-year 100 10/23 up 8/32 2.462% -2.9BP
3 3/8% 30-year 102 29/32 up 25/32 3.222% -4.1BP
2-10-Yr Yield Spread: +192.0BPS Vs +198.9BPS
Source: Tradeweb
Write to Min Zeng at min.zeng@wsj.com