MW: Treasury prices fall as flight-to-safety trade loses steam
Treasury prices fell Wednesday morning, driving yields higher, as the market gave back some of the gains it booked during Tuesday’s global flight-to-safety rally.
Concerns over a global growth slowdown have recently fueled demand for safe investments, such as U.S. government bonds.
On Wednesday Treasurys got an early boost after a widely watched Chinese manufacturing gauge fall to its lowest level since March 2009, sparking an overnight flight to safety into Treasury bonds.
But investor sentiment improved Wednesday morning, after mixed manufacturing data from the eurozone indicated the region is on a solid track to recovery, bringing Treasurys under selling pressure.
The yield on the 10-year benchmark Treasury note TMUBMUSD10Y, +1.00% rose 2.6 basis points to 2.153% and the 30-year bond TMUBMUSD30Y, +0.52% yield gained 2.5 basis points to 2.957%, according to Tradeweb.
Among shorter maturities, the yield on the two-year Treasury note TMUBMUSD02Y, +1.05% was unchanged at 0.699%.
Treasury yields rise when prices fall and vice versa.
In the near term, Treasury yields will continue to move “under the uncertainty of the international economic backdrop,” said Jack Flaherty, co-portfolio manager of unconstrained bond strategy at GAM.
This backdrop of a global slowdown will likely prevent Treasury yields from rising sharply, Flaherty said, despite the fact that the data-dependent Federal Reserve is expected to raise interest rates in the next few months.
As the October and December meetings of the Fed’s rate-setting committee approach, “we anticipate the Fed will be less concerned about the incoming domestic data and more focused on the situations developing overseas,” said Ian Lyngen, senior rates strategist at CRT Capital Group, in a note to clients Wednesday.
Treasury investors largely shrugged off a reading of a Markit index that showed U.S. manufacturers had the slowest pace of growth in September in 22 months.
“This creates a somewhat asymmetric set of market risks for the incoming [U.S.] data; strong reports on growth and employment will simply be dismissed as confirming the trend that points to a December hike whereas disappointments will bolster the case for delaying tightening until 2016,” Lyngen said.
Meanwhile, in Europe government yields were also under some selling pressure, following remarks by European Central Bank President Mario Draghi that further signaled that the ECB is ready expand its quantitative easing program to fend off the threat of low inflation.
The yield on the benchmark 10-year German bond TMBMKDE-10Y, +1.68% known as the bund, gained 1.2 basis points to 0.609%, after falling Tuesday to its lowest level since late August.
