U.S. 30-year bonds returned six times what investors earned in the broader Treasury market over the past two weeks as forecasts for Federal Reserve interest-rate increases in 2015 hold back short-term notes.
Thirty-year securities rose 2.4 percent in the two weeks ended yesterday, for a gain of 13.7 percent in 2014, based on Bank of America Merrill Lynch indexes. The whole market returned 0.4 percent over two weeks and 3 percent this year. Shorter maturities are more sensitive to what the Fed does with its benchmark rate, while longer-dated debt is more influenced by inflation.
“The two- to three-year, even out to the five-year, sector of the curve is impacted by the simple fact that day-by-day, week-by-week, we move closer to the Fed hiking cycle,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. “The long end is protected by the view that the terminal rate for the cycle may be lower, the Fed thinks it will take a very long time to get there and upside inflation risks remain limited.”
The U.S. 30-year yield fell two basis points, or 0.02 percentage point, to 3.32 percent at 6:50 a.m. New York time, according to Bloomberg Bond Trader data. The 3.375 percent bond due in May 2044 rose 3/8, or $3.75 per $1,000 face amount, to 101 2/32. The benchmark 10-year note yield fell two basis points to 2.51 percent and the two-year rate was little changed at 0.48 percent.
Demand for the longest maturities has narrowed the difference between two- and 30-year yields to 284 basis points, the least since May 2013. A yield curve is a chart showing rates on bonds of different maturities.
Investors see about a 70 percent chance the Fed will raise its key rate by September 2015, futures contracts show. The central bank has kept its target for the benchmark, the rate banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.
“People are acknowledging that the Fed will start to hike rates next year,” said Hideo Shimomura, chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo. “Inflation is quite tame. We are overweight longer-term bonds.” The company manages the equivalent of $78.7 billion.
Retail sales, producer prices and manufacturing all advanced in June, according to data released this week.
The personal consumption expenditures index, the Fed’s preferred inflation gauge, rose 1.8 percent in May from a year earlier, the most since October 2012, based on the latest government data. It’s still short of the Fed’s 2 percent target.
“The yield curve continues to flatten with the longer end helped by rising geopolitical tensions,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “The short end looks set to struggle as further strong labor-market reports prompt a shift in the Fed’s policy stance in coming months. The risk is the first rate hike takes place before mid-2015.”
China and Japan, the two largest buyers of Treasurys outside the U.S., increased their holdings of the debt in May, data reported yesterday showed.
The two countries, which held a total of $2.49 trillion of U.S. government securities, or 21 percent of the $12.08 trillion of the publicly held debt, were the biggest overseas buyers of Treasurys for the month, with Japan purchasing $10.4 billion and China $7.7 billion.
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