U.S. Treasury Bonds Gain on Greece; Fed Rate Statement Looms

By Min Zeng 

        U.S. government-bond prices rose for the second straight day on Tuesday as investors sought refuge amid jitters over a possible default by Greece.
        The breakdown in talks between Greek officials and international creditors over the country's debt has sparked worries about how a default would ripple through global financial markets and the eurozone economy. That has bolstered the allure of Treasurys and other developed-country bonds, which had sold off sharply in recent weeks on improving economic data and valuation concerns.
        In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 2.315%, down from 2.358% on Monday. The yield hit an eight-month high of 2.5% during intraday trading last week. Bond yields fall when prices rise.
        "I don't think anyone knows the extent of the market reaction to the potential fallout and that uncertainty is bringing in the safe-haven bid in Treasury bonds," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
        A $25 billion sale of four-week Treasury debt on Tuesday drew the strongest demand since September. Investors accepted a yield of zero for the first time in more than a month, handing the U.S. government free cash in exchange for easy-to-trade assets.
        The recent movements in Treasurys illustrate the opposing forces duking it out in the bond market. The latest flare-up in the Greek debt crisis and persistent worries about tepid global growth are lending support to bonds, while a brightening economic outlook in the U.S. and the prospect of higher interest rates weighs on the market.
        Traders are awaiting the outcome of the Federal Reserve's latest monetary-policy meeting, which started on Tuesday and is set to conclude Wednesday, followed by a news conference by Fed Chairwoman Janet Yellen.
        Strong jobs data and an uptick in wage inflation have bolstered the case for the Fed to start raising interest rates as soon as September, although some market watchers expressed doubts about the timing.
        "If there is a big sovereign-debt spillover, or a big hit to U.S. equity markets, then they will not raise rates," said David Keeble, global head of interest-rates strategy at Credit Agricole in New York. "They probably want to have clarity on Greece before raising rates," a case that would encourage investors to buy Treasury bonds.
        Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, said he expects the Fed to lower its longer-run interest-rate projections on Wednesday to 3.5% from 3.75%, the central bank's forecast in March.
        "There's a good reason to be bullish on longer Treasury bonds at these [yield] levels," said Mr. LeBas, who believes that the U.S. economy is stuck in low growth driven by aging populations, low birth rates and falling productivity.
        This month through Monday, U.S. Treasury securities have posted a loss of 1.14%, investment-grade corporate bonds are down 1.71%, junk bonds lost 1.15% and municipal bonds returned a negative 0.31%, according to Barclays PLC. These total returns reflect price declines and coupon payments.
        The S&P 500 stock index is down 1% over the same period.
        Investors pulled out $456 million of cash from U.S.-based mutual funds and exchange-traded funds targeting the Treasury bond market for the week that ended June 10, according to fund-tracking company Lipper. The net cash withdrawal for the past three weeks totaled $2.732 billion, the biggest three-week outflow since March.
        Investors are mindful of the "taper tantrum" in May and June of 2013 when a selloff of Treasury bonds spread to stocks, corporate bonds and emerging-market assets.
        James Camp, head of fixed income at Eagle Asset Management, which has about $32.8 billion assets under management at the end of March, said he doesn't expect Treasurys to sell off as sharply as they did then given the moderate growth outlook and the Fed's signals that it will go slow in raising rates.
        Mr. Camp has cut holdings of corporate bonds and bought Treasury bonds.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        June 16, 2015 17:37 ET (21:37 GMT)

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