U.S. Government Bonds Rally On Stock Declines

By Cynthia Lin 

        U.S. Treasurys rallied Monday as a broad decline in global stocks spurred appetite for safer assets.
        In early New York trading, benchmark 10-year notes gained 14/32 in price to yield 2.221%, according to Tradeweb. The 30-year bond advanced 1 1/32 to yield 2.919%, its lowest rate since June 1. Bond yields decline when prices rise.
        Those gains came as equity markets in China suffered sharp declines, with the Shanghai Composite Index posting its worst daily percentage loss since February 2007. Concerns about stability in those markets put pressure on stocks in Europe, with U.S. shares pointing to a lower open as well.
        "The Treasury market has been in a reactionary mode recently--between the Greek drama, selloff in commodities, and ongoing Chinese stock meltdown, rates have simply been the residual of external factors," said Ian Lyngen, U.S. government bond strategist at CRT Capital.
        The latest round of weakness in commodities has worked against expectations for rising inflation, which hurts returns on fixed-income securities. The lack of inflationary pressure has helped longer-dated Treasurys post particularly strong gains.
        Meanwhile, gains in shorter-dated Treasurys have been held in check amid the prospect of tighter Federal Reserve policy. The central bank is scheduled to deliver a policy statement Wednesday.
        Although the Fed is expected to stand pat this month, officials, including Fed Chairwoman Janet Yellen, have said recently that they remain on track to raise interest rates later this year for the first time in nearly a decade.
        "Global conditions are certainly far from ideal, but with Greek concerns resolved and only Chinese equity wobbles presenting a near-term challenge, the FOMC may sound more upbeat on rate hike prospects," said Gennadiy Goldberg, a U.S. strategist at TD Securities. He said that such a signal from the Fed could put further pressure on shorter-date notes.
        That combination of declining long-end yields and rising short-end yields has flattened out the so-called Treasury yield curve in recent weeks. The yield gap between two- and 10-year Treasurys narrowed to 1.56 percentage point Monday, from 1.74 at the start of the month and now the smallest since early June.
        Still, the prospect for Fed tightening is far from certain given the array for global concerns and mixed U.S. economic data. A report Monday morning showed U.S. durable-goods orders in June rising, but on the back of a downward revision to May's orders.
        Odds implied in the Fed funds futures market suggest investors aren't fully convinced that the Fed will pull the trigger on tighter policy come September. Contracts recently implied just a 19% chance that the Fed raises the policy rate in September, and 57% chance for a move in December, according to the CME.
        Write to Cynthia Lin at cynthia.lin@wsj.com
        (END) Dow Jones Newswires

        July 27, 2015 09:27 ET (13:27 GMT)

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