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Fidelity Inflation-Protected Bond Fund
Treasury 10-year note yields traded at almost a seven-month low after talks to form a Greek government failed, boosting demand for safe assets.
A report showed international demand for U.S. financial assets rose in March as investors sought refuge from Europe’s debt crisis. Treasuries fell earlier after European reports showed the region avoided a recession and Germany expanded faster than economists predicted.
“Once you heard about the lack of a Greek government, the flight-to-quality bid just popped,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “Europe’s really taking a toll on the markets.”
The benchmark 10-year yield rose less than one basis point, or 0.01 percentage point, to 1.77 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 fell 1/32, or 31 cents per $1,000 face amount, to 99 26/32.
The yield rose as high as 1.81 percent. It declined earlier to 1.76 percent, the lowest since Oct. 4, and reached a record low 1.67 percent on Sept. 23 after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.
“The market is waiting for another shoe to drop” in Europe, said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., a primary dealers that trade directly with the Fed. “I don’t think the rally is over.”
Treasuries investors raised bets to the highest level in more than two months that the price of the securities will advance, according to a weekly survey by JPMorgan Chase & Co.
The percent of “net longs” rose the most since March 5 to 11 percentage points in the week ending yesterday from zero the previous week. The number of outright longs rose by 9 percentage points to 26 percent, the most since Feb. 27. The percent of shorts decreased to 15 percent, from 17 percent. A long position is a bet that an asset will increase in value, while a short is a wager it will decrease.
Volatility, as measured by the Bank of America Merrill Lynch MOVE index, rose to 70.3, the most since April 25, and up from an almost-five-year-low of 56.7 on May 7.
Overseas investors boosted their holdings of U.S. government securities for a ninth consecutive month by $17.8 billion or 0.3 percent to $5.12 trillion, according to the Treasury Department. Foreign investors held $5.1 trillion in February.
China, the largest foreign lender to the U.S., increased its position in Treasuries in March by $14.7 billion or 1.3 percent to $1.17 trillion. China’s holdings fell 0.9 percent to $1.155 trillion in February, revised data released today by the Treasury show.
China increased its holdings of longer-term notes and bonds by $14.6 billion, or 1.3 percent, to $1.166 trillion. Its stake in short-term bills rose by $100 million to $3.9 billion, according to the Treasury.
Gross domestic product in the euro region (EUGNEMUQ) was unchanged last quarter, the European Union’s statistics office said in Luxembourg. The median forecast of economists surveyed by Bloomberg was for a 0.2 percent contraction. German GDP rose 0.5 percent from the fourth quarter, exceeding economist predictions for growth of 0.1 percent.
Greece’s decision to hold more elections in the search for a government led German Finance Minister Wolfgang Schaeuble to call the vote a referendum on whether the country stays in the euro.
Post-election attempts to form a ruling coalition in Athens broke down after nine days, sending Greeks back to the polls next month with surveys giving the lead to an anti-bailout party that would tear up the conditions attached to 240 billion euros ($307 billion) of aid.
“We’re still keeping yields historically low, related to Europe,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The only constant here is that the short-end remains anchored. Everything else seems to be related to the latest news from Europe.”
Seven-year Treasury yields climbed one basis point to 1.18 percent, after matching the all-time low of 1.1679 percent set yesterday.
The yield on German 10-year bunds, Europe’s benchmark security, added one basis point to 1.47 percent.
The Fed sold $8.6 billion of Treasuries due from February to May 2014 today, according to the Fed Bank of New York’s website. The sales are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs.
The U.S. government will sell $13 billion of 10-year inflation-indexed bonds on May 17.
Bill Irving, manager of the Fidelity Inflation-Protected Bond Fund (FINPX), said he is “cautious” about conventional U.S. debt and Treasury Inflation Protected Securities.
“They are vulnerable in the event that GDP growth strengthens and yields increase back to more normal long-term levels,” he wrote in a report on the company’s website yesterday. Fidelity Investments is based in Boston and oversees $1.61 trillion.
A measure of the U.S. cost of living was unchanged in April, restrained by a drop in energy prices and supporting the view of some Fed policy makers that inflation will ease. Last month’s consumer-price index matched the median forecast of economists surveyed by Bloomberg News and followed three straight gains that included a 0.3 percent rise in March, Labor Department data showed today in Washington.
The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.15 percentage points after falling to 2.09 points yesterday, the least since Feb. 1. The figure is close to the 2.15 percentage point average during the past decade.
The five-year, five-year forward break-even rate, a measure of traders’ inflation expectations that the Fed uses to help guide monetary policy was at 2.56 percent as of May 10. The figure compares with a 2012 high of 2.78 percent and its five- year average of 2.79 percent.
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