By Cynthia Lin
U.S. Treasurys ended November with a rally, adding to an
unexpected year of gains as investors sought safer bonds in the
face of weak inflation.
Prices rounded out Friday's early 2 p.m. close at session highs.
Benchmark 10-year notes rose 17/32 in price to yield 2.173%. The
rate slipped as far as 2.16%, the lowest in more than a month. The
30-year bond rallied 30/32 to yield 2.893%. Bond yields fall when
prices rise.
The market was closed Thursday in observance of Thanksgiving.
While some market participants noted that subpar volume may have
exaggerated the session's gains, many agreed that the broader theme
of weak inflation and choppy global growth served to support U.S.
government bonds.
"We're seeing that even with low yields there's still a bid to
Treasurys," said David Ader, a government bond strategist at CRT
Capital Group.
Friday's gains added to the 0.6% total return posted by the
overall market for the month as of Nov. 26, based on Barclays'
Treasury index. For the year, the market has handed owners 4.7% in
total return.
The 2014 rally flies in the face of widespread expectations for
a year of falling Treasury prices as investors expected a
recovering U.S. economy and tightening Federal Reserve policy to
put pressure on safer bonds. Instead, the 10-year yield fell as low
as 1.85% in October, from just above 3% at the start of the
year.
"This year has been a global yield story," said Dan Heckman, a
fixed-income strategist at U.S. Bank Wealth Management. "Our yields
are still measurably higher than other places that compete for
global funds."
Indeed, yields on bonds backed by various nations fell to record
lows in recent sessions on signs of lackluster inflation. A lack of
growth in consumer prices is generally supportive of fixed-income
investments, but recent readings have the extra weigh of raising
expectations that monetary policy authorities will deliver further
easing measures to fight off disinflation.
Germany, the eurozone's largest economy, saw its inflation rate
slip to 0.5% in November. That was followed up with the eurozone
reporting a mere 0.3% rise in consumer prices in November from a
year ago. Japan also reported a slowdown in inflation in October
for the third consecutive month.
Germany's 10-year bund hit a record low of 0.65%, while Japan's
two-year yield fell below zero for the first time ever. France saw
its 10-year yield slip below 1% for the first time.
Bond traders said that is having a gravitational pull on U.S.
Treasury yields, even as the U.S. economy shows signs of
improvement and the Fed is expected to start tightening policy in
2015.
"It feels like Treasury yields are being sucked into a black
hole of negative yields," said William O'Donnell, rates strategist
at RBS Securities. "As long as rate differentials make Treasurys
look like a bargain to yield-starved global investors, it's
probably going to be a herculean challenge to push U.S. rates up
and keep them up given what's going on elsewhere."
Indeed, many analysts had expected the U.S. 10-year yield to end
the year above 3% on the back of an improving labor market and
gradual end of the Fed's bond-buying program. Over the past few
months, many forecasters have lowered their year-end calls to
around 2.3% to 2.5%.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
3/8% 2-year 100 1/32 up 2/32 0.476% -4.0BP
7/8% 3-Year 100 1/32 up 5/32 0.862% -5.0BP
1 3/4% 5-year 100 1/32 up 9/32 1.493% -5.9BP
2% 7-Year 99 28/32 up 13/32 1.892% -6.4BP
2 1/4% 10-year 100 22/32 up 17/32 2.173% -6.1BP
3% 30-year 102 4/32 up 30/32 2.893% -4.7BP
2-10-Yr Yield Spread: +169.7 BPS Vs +171.8 BPS
Source: Tradeweb/WSJ Market
Write to Cynthia Lin at cynthia.lin@wsj.com