U.S. 10-Year Bond Yield Falls

By Min Zeng 

        Yields on benchmark 10-year U.S. Treasury notes fell to the lowest level in two weeks Wednesday as weaker stocks and commodities boosted demand for safer assets.
        Crude oil, gold and copper sold off, reducing concerns over inflation, which is the main threat to the value of bonds over time. A gauge of five-year inflation expectations in the U.S. government debt market fell to a four-month low.
        "It was a bit of risk-off trade that benefited the Treasury market," said Larry Milstein, head of government and agency trading at R.W. Pressprich Co. in New York.
        In recent trading, the yield on the 10-year Treasury note was 2.318%, compared with 2.342% on Tuesday, according to Tradeweb. Yields fall as prices rise.
        The resumption of a selloff in commodities this month has been driven partly by concerns over the prospect of higher interest rates in the U.S. and a slowing economy in China, which is still reeling from its recent stock market turmoil.
        Federal Reserve Chairwoman Janet Yellen signaled last week that the central bank was on course to start raising benchmark short-term interest rates later this year. She said weaker energy prices would be temporary in holding down inflation, even though some investors and analysts said the commodities markets could complicate the Fed's tightening plan.
        Treasury yields have risen over the past few months after a decline earlier this year. Investors have shed their bondholdings amid concerns that a shift in the Fed's monetary policy would shrink the value of outstanding bonds. The 10-year yield hit this year's intraday peak of 2.5% in June, the highest level since September. The yield was 2.173% at the end of last year.
        Many investors don't expect the 10-year yield to rise sharply, citing a still- moderate pace of U.S. economic growth and contained wage inflation. Ms. Yellen said this tightening cycle would be gradual and slow, also reducing investors' worries of a spike in the yield.
        The Fed is hoping that its message of a go-slow approach in this fresh tightening campaign can sink widely into the $12.7 trillion U.S. government debt market, which is imperative to not only the U.S. economic outlook but also to the health of global financial markets.
        The yield on the benchmark 10-year Treasury note is used to price a wide range of financing activities including mortgages, corporate bond supply and business loans.
        Scott Buchta, head of fixed-income strategy at Brean Capital LLC, said he sees the 10-year yield between 2.5% and 2.75% as a fair value zone, which means that a further rise in the yield would bring in buyers and keep a lid on its ascent.
        The Fed's next policy meeting is scheduled for July 28-29.
        Investors and analysts say shorter-dated Treasury notes are more vulnerable to the Fed's tightening campaign because these yields are pinned by the Fed's benchmark fed-funds rate. The Fed has held the policy rate near zero since December 2008.
        Reflecting the view, investors have been moving money away from shorter-dated Treasury notes and into longer-dated bonds, pushing the yield premium to own longer-dated bonds lower.
        A shrinking premium is known on Wall Street as a flattening yield curve. On Wednesday, the yield premium to hold the 10-year Treasury note instead of the two-year note was 1.62 percentage points, the lowest level since early June.
        Fed-funds futures, used by investors and traders to place bets on central bank policy, showed Wednesday that investors and traders see a 19% likelihood of a rate increase at the September Fed meeting, according to data from the CME Group.
        The odds were 17% a month ago.
        "The notion is that the Fed can talk the talk, but can they walk the walk" when it comes to tightening monetary policy, asked Mr. Buchta of Brean Capital. The bond market, he said, hasn't priced in a "high probability" of a rate increase in September, which means that bond yields have room to rise should the Fed pull the trigger that month.
        The Fed is the only major central bank considering raising rates this year. Many central banks around the world have cut interest rates or launched asset purchases to boost flagging growth.
        Analysts say such a loose monetary stimulus backdrop will keep a lid on global bond yields. U.S. Treasury debt continues to offer higher yields compared with its counterparts in Germany, Japan, the U.K. and France.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        July 22, 2015 13:03 ET (17:03 GMT)

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