Treasury Rise to Continue Win Streak

By Min Zeng 

        U.S. government bonds rose Tuesday to cap the fifth quarterly gain in a row, the longest winning streak in more than a decade.
        The $12.5 trillion market continues to lure investors left uncertain by uneven global growth and subdued inflation in the developed world. Mixed economic readings in the U.S. during a harsh winter have bolstered investors' expectations that the Federal Reserve will maintain an accommodative monetary policy, which tends to benefit bond prices.
        Treasurys also offer higher yields than comparable debt elsewhere in the developed world, another reason investors have kept piling in.
        "The yield differential between the U.S. and the rest of the world continues to drive foreign buyers into Treasury bonds," said Thomas Roth, executive director in the U.S. government bond trading group at Mitsubishi UFJ Securities (USA) Inc. in New York. "Domestic investors [have] become convinced by Federal Reserve officials that these low yields are here to stay."
        In late afternoon trading, the yield on the benchmark 10-year Treasury note was 1.930%, down from 1.959% on Monday. Yields fall when bond prices rise.
        That's down from 2.173% at the end of 2014. Tuesday, the yield on the 10-year German government bond was 0.183%, the yield on the 10-year government bond in Japan was 0.397% and the yield on the 10-year U.K. government bond was 1.582%, according to Tradeweb.
        The last time the yield fell for five quarters in a row was back in March 2001, when the yield on the 10-year note was 4.923%. Demand for haven bonds surged in early 2001 as the U.S. economy was hit by a recession after the collapse of the dot-com stock bubble.
        U.S. bond yields have fallen since the start of 2014, a move that has confounded many traders and analysts on Wall Street who had predicted yields would rise in response to an improving U.S. economy and the prospect of higher interest rates. Some investors still expect bond yields to grind higher in the months ahead at a modest pace. Bond strategists at Goldman Sachs Group Inc. now peg the end-2015 yield on the 10-year Treasury yield at 2.5%, down from the 3% forecast at the start of the year.
        A basket of Treasurys of varying maturities had returned 1.48%, including both price appreciation and interest payments, this year through Monday, according to Barclays PLC.
        That's on top of a 5.05% return last year.
        But low yields mean less income. With yields near historic lows, bondholders are more vulnerable to losses if yields snap higher because price declines could outpace interest payments.
        In a sign of investors' hunger for income, some riskier bonds have performed better than Treasurys. Debt sold by lower-rated U.S. companies, known as junk bonds, posted a return of about 2.5% this year through Monday, according to Barclays. U.S. investment-grade corporate bonds returned 2.1% over the same period.
        Higher short-term interest rates could dent the value of outstanding bonds, as buyers are likely to flock to new bonds issued at higher yields.
        The 10-year Treasury yield tumbled to 1.669% on Feb. 2, the lowest closing level since May 2013, amid worries over the global growth outlook. The yield then surged to 2.24% on March 6, the highest level since December 2014, after the nonfarm-payrolls report for February showed strong jobs growth.
        Fed Chairwoman Janet Yellen said last week the timing of any rate increase hinges on how the economy performs in the months ahead. She said the cycle of tightened credit this time would be gradual. The Fed last raised interest rates in 2006. It has kept the fed-funds target rate near zero since December 2008.
        Many investors still see a very low probability of a rate increase this summer. The federal-funds futures, used by investors and traders to place bets on central-bank policy, showed Tuesday that the market sees a 6% likelihood of a rate increase in June, unchanged from Monday, according to data from CME Group.
        The odds were 54% for a rate increase at the October meeting, a sign bettors expect the central bank to tighten during the fourth quarter of the year.
        The March jobs report, due this Friday, is likely to be key in shaping the debate on the Fed's policy outlook. The Fed's next policy meeting is set for April 28-29.
        "As long as the economy rebounds from its first-quarter dip, yields are likely to be materially higher in the next few months," said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management, which manages $62.8 billion of assets.
        Mr. Dowding said he has been allocating less money to Treasurys than the benchmark bond index does, and plans to stick with this underweight allocation.
        Write to Min Zeng at min.zeng@wsj.com
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        (END) Dow Jones Newswires

        March 31, 2015 18:00 ET (22:00 GMT)

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