By Min Zeng
Investors scooped up ultrasafe U.S. government debt on Tuesday,
driven by a 3.4% plunge in durable goods and a selloff in U.S.
stocks.
The flight to safety sent the benchmark 10-year note's yield to
near a 20-month low. The yield on the 30-year bond fell to near a
record low. Bond prices rise as their yields fall.
Economists had expected durable goods to show a 0.3% gain in
December. The latest sign of falling business spending cast some
doubt on the strength of the U.S. economy, which has been the sole
bright spot amid uncertain global growth.
The Federal Reserve starts its two-day monetary policy meeting
Tuesday and is scheduled to release an interest-rate statement on
Wednesday. Fed officials have signaled they are prepared to raise
interest rates around the middle of this year, but many investors
expect an uncertain outlook will keep the Fed on hold until late
2015.
The durable goods report flags the risk that "the U.S. will not
be immune to the stagnation in global growth and the sharp decline
in energy prices," said James DeMasi, chief fixed-income strategist
at Stifel Nicolaus & Co. in Baltimore.
Mr. DeMasi said he expects no interest-rare increase from the
Fed prior to the fourth quarter of 2015, "with a delay into 2016
becoming increasingly likely."
In recent trade, the yield on the benchmark 10-year Treasury
note was 1.762%, compared with 1.830% on Monday, according to
Tradeweb.
The yield on the 30-year bond fell to 2.339% from 2.401%
Monday.
Demand for haven bonds has climbed this month due to an
uncertain global growth outlook and deflation risks in Europe. The
European Central Bank's plan last week to buy bonds has sent yields
in the eurozone's government bonds to record lows, attracting
buyers into higher-yielding Treasury bonds.
The 10-year yield hit 1.695% on Jan. 16, the lowest intraday
level since May 2013, according to CQG. The yield was 2.173% at the
end of 2014.
The 30-year bond yield touched 2.323% on Jan. 26, the lowest
intraday low on record.
Lower yields on government bonds could be a boon for the housing
market as they push down mortgage rates. Companies also benefit by
locking in favorable borrowing costs when selling new debt.
But lower yields mean investors have to make do with lower
income, pushing many to dial in to riskier bonds for higher yields.
Investors also caution that bond buyers may be vulnerable if
sentiment sours on bonds, as slim yields offer a thin layer of
protection against the risk of capital losses.
Some analysts say bond yields still have room to fall given the
uncertain global outlook.
"Yields can stay low and maybe go lower," said David Ader, head
of government bond strategy at CRT Capital Group LLC.
Mr. Ader pointed to weak U.S. corporate earnings as a sign a
stronger dollar is hurting the economic outlook, another evidence
for the Fed to be patient in raising interest rates.
"What's the rush? They won't raise rates until 2016," said Mr.
Ader.
Fed-funds futures, used by investors and traders to place bets
on central-bank policy, showed Tuesday that investors and traders
see a 12% likelihood of a rate increase at the June 2015 Fed policy
meeting, according to data from CME Group Inc. The odds were 29% a
month ago.
Trading may be lighter than usual due to a snowstorm hitting the
Northeast, said some traders, adding that this may exaggerate some
of the moves in the bond market.
An additional boost for haven Treasury debt is concern over a
potential showdown between Greece's new government and
international creditors following the victory of the leftist Syriza
party in elections on Sunday.
Syriza has advocated for renegotiation with international
creditors over harsh terms on the financial bailout during the
eurozone's sovereign debt crisis in 2010-12.
The impact so far on markets, especially in the eurozone, has
been moderate compared with 2012. The European Central Bank has
stepped in with bold actions to curb the risk of a breakup of the
monetary union.
Last Thursday, the ECB announced that it will start buying
bonds-including government debt in the eurozone-in March at a pace
of 60 billion euros ($67.7 billion) a month.
Write to Min Zeng at min.zeng@wsj.com