By Cynthia Lin
Gains in U.S. Treasurys on Friday pushed the 10-year yield to
its lowest level in four weeks, but wasn't enough to claw the
market out of a monthly loss.
Benchmark 10-year notes gained 10/32 in price to yield 2.097%,
the lowest closing level since April 30. Two-year notes gained 1/32
to yield 0.605%. Bond yields decline when prices rise.
Prices rose as a sharp drop in Chicago-area factory activity
fueled demand for safer bonds, while typical month-end purchases
from money managers squaring positions supported Treasurys.
"Factors in Treasurys in the month of May have been more
technical in nature, but economic fundamentals are still somewhat
positive for the market," said Gary Pollack, head of fixed-income
trading at Deutsche Bank's private wealth-management arm.
Dan Mulhollad, senior U.S. Treasury trader at Credit Agricole,
said Friday's rally was driven by a particularly large month-end
effect. Money managers who benchmark their bond portfolios to
indexes have to align their positions when new bonds are worked
into those benchmarks at the close of each month.
That so-called index extension for May is estimated to be the
largest since August 2009, bond traders and strategists said.
Still, May has been a rough month for Treasurys despite
lackluster U.S. economic data that would normally support the
safe-haven bonds. The market started the month in the middle of an
8-day selling streak as eurozone government bonds sold off on
concerns of an overstretched rally.
A wave of bond offerings from U.S. corporations also took a toll
on Treasury prices. The 10-year yield hit a 2015 high of 2.37% on
May 12.
For the month, Treasurys have handed investors a total loss of
0.38% through May 28, according to Barclays. That reduced the
market's total return so far this year to 0.7%.
Bond investors look for U.S. economics to regain control of the
market in June, as long as eurozone bonds remain calm and ongoing
negotiations between Greece and its creditors don't strike a
nerve.
The Commerce Department early Friday said the U.S. economy
shrank 0.7% in the first quarter instead of expanding 0.2% as
originally reported. While investors are hopeful for a spring
rebound, traders say it will take a string of positive U.S. data to
further chip away at Treasurys and pull forward expectations for
when the Federal Reserve will start tightening policy.
"While the sticker shock of a negative 1Q GDP print [result]
could prove supportive to Treasurys," other more up-to-date data
will help shape Fed policy expectations, said Gennadiy Goldberg, a
U.S. strategist at TD Securities.
Fed Chairwoman Janet Yellen's latest comments suggest the
central bank is still on track to raise interest rates this
year--an event that is keeping bond investors on edge.
Many investors started the year thinking the Fed would tighten
policy by midyear. But after the weak first-quarter performance,
expectations have been pushed back to September and December, while
some don't even see a move until early 2016. The Fed's
policy-setting board is scheduled to deliver an updated policy
statement and economic projections on June 17.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
5/8% 2-year 100 1/32 up 1/32 0.605% -2.0BP
1% 3-year 100 6/32 up 2/32 0.930% -1.2BP
1 1/2% 5-year 100 1/32 up 3/32 1.490% -1.9BP
1 3/4% 7-year 100 0/32 up 3/32 1.873% -1.0BP
2 1/8% 10-year 100 8/32 up 10/32 2.097% -3.5BP
2 1/2% 30-year 102 26/32 up 17/32 2.859% -3.7BP
2-10-Yr Yield Spread: +160.1BPS +169.2BPS
Source: Tradeweb/WSJ Market Data Group
Write to Cynthia Lin at cynthia.lin@wsj.com