July 17 (Bloomberg) -- Treasuries rose, with 30-year bond yields falling to the lowest level in more than six weeks, after Russia was slapped with further sanctions linked to Ukraine, boosting demand for the perceived safety of U.S. debt.
The difference between five- and 30-year yields narrowed to the least since 2009 a day after Fed Chair Janet Yellen told lawmakers monetary stimulus is still needed, while increases in interest rates may occur sooner if the economy accelerates. U.S. 30-year bonds have returned six times what investors earned in the broader Treasury market during the past two weeks.
“They’ve been buying longer-dated paper on the flight-to- quality,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The Russian situation triggered short-covering.” Short positions are bets that an asset will decline in value.
The U.S. 30-year yield fell one basis point, or 0.01 percentage point, to 3.31 percent at 8:20 a.m. New York time, according to Bloomberg Bond Trader data. The 3.375 percent bond due in May 2044 rose 1/4, or $2.50 per $1,000 face amount, to 100 30/32. The yield touched 3.31 percent, the lowest level since May 30.
The benchmark 10-year note yield fell one basis point to 2.52 percent and the two-year yield was little changed at 0.48 percent.
The gap between five-year notes and 30-year bonds, known as the yield curve, shrank as low as 163 basis points, the least since February 2009. A yield curve is a chart showing rates on bonds of different maturities.
“The two- to three-year, even out to the five-year, sector of the curve is impacted by the simple fact that day-by-day, week-by-week, we move closer to the Fed hiking cycle,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. “The long end is protected by the view that the terminal rate for the cycle may be lower, the Fed thinks it will take a very long time to get there and upside inflation risks remain limited.”
Thirty-year securities rose 2.4 percent in the two weeks ended yesterday, for a gain of 13.7 percent in 2014, based on Bank of America Merrill Lynch indexes. The whole market returned 0.4 percent over two weeks and 3 percent this year. Shorter maturities are more sensitive to what the Fed does with its benchmark rate, while longer-dated debt is more influenced by inflation.
“If the labor market continues to improve more quickly than anticipated,” then increases in the federal funds rate target likely would occur sooner than currently envisioned, Yellen told the House Financial Services Committee yesterday.
The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25 percent since December 2008.
Investors see a 75 percent chance the Fed will raise its key rate by September 2015, futures contracts show. The central bank has kept its target for the benchmark, the rate banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.
’’The front end is most vulnerable because of Fed expectations,’’ CIBC’s Tucci said. “The front end will continue to underperform.”
Treasuries rose as the U.S. and the European Union imposed the most aggressive sanctions to date on Russian businesses and said more may follow, acting after weeks of threats to squeeze the $2 trillion economy due to the confrontation in Ukraine.
The sanctions will prevent the Russian companies from accessing U.S. equity or debt markets for new financing with a maturity beyond 90 days. That will raise borrowing costs and effectively cut off medium- and long-term U.S. financing.
“The yield curve continues to flatten with the longer end helped by rising geopolitical tensions,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh.