BOND REPORT: Government Bonds Draw Bids As U.S.-North Korea Tensions Mount

By Rachel Koning Beals

Looming supply is keeping Treasury gains in check

U.S. Treasurys on Wednesday drew buyers attracted to the perceived safety of government paper, pushing yields lower, as the world monitored escalating, bellicose rhetoric between the U.S. and North Korea.

The 10-year benchmark Treasury note's yield fell about 4.2 basis points to 2.240%, extending a yield slump seen over the first two days of the week. Yields fall as prices gain.

The yield for the two-year Treasury note was down 2.8 basis points, at 1.335%, while the 30-year Treasury fell 4.7 basis points to 2.820%.

The German 10-year government bond's yield shed nearly 4 basis points to 0.4400%.

A shift to haven assets also saw investors also buy Swiss francs, the Japanese yen--which hit an eight-week high against the dollar (http://www.marketwatch.com/story/dollar-slides-vs-swiss-franc-as-us-north-korea-discord-prompts-run-to-safety-2017-08-09)--and gold futures, (http://www.marketwatch.com/story/gold-gains-about-1-as-us-north-korea-tensions-grow-2017-08-09) which all tend to lure bidders in times of uncertainty or fear, and move inversely to risk assets like stocks. The Dow Jones Industrial nd the S&P 500 index were set to decline along with the other global equity benchmarks.

Swings on Wall Street come as North Korean leader Kim Jong Un made his most explicit threat to strike a U.S. military base in Guam (http://www.marketwatch.com/story/north-korea-threatens-missile-strike-on-us-base-on-guam-2017-08-08) following President Donald Trump's warning to Pyongyang not to "make any more threats" to the U.S., saying it would face a "fire and fury" response (http://www.marketwatch.com/story/trump-today-president-says-north-korea-faces-fire-and-fury-if-it-doesnt-halt-threats-2017-08-08) "like the world has never seen."

Still, despite dip in yields, implying demand for sovereign paper has picked up, one measure of volatility in government bonds was relatively muted, according to Tom di Galoma, managing director of Treasury trading at Seaport Global.

Bank of America Merrill Lynch's MOVE index was currently around 47.33, below its one year average of about 64.5 and five-year average of 69.59.

That said, di Galoma said he viewed a "North Korea skirmish or battle a very realistic thing."

The Treasury trader attributed the muted reaction in the bond-volatility gauge to market participants continued to sell volatility, with hope of a spike, with few buyers emerging.

Trump's on Tuesday came after the Washington Post report (https://www.washingtonpost.com/world/national-security/north-korea-now-making-missile-ready-nuclear-weapons-us-analysts-say/2017/08/08/e14b882a-7b6b-11e7-9d08-b79f191668ed_story.html?utm_term=.0938becb046e) that North Korea has built a miniaturized nuclear warhead, that could give it the ability to deliver a nuclear-grade payload to a target in the Asian region.

"The bellicose rhetoric from the U.S. and North Korean officials is the main driver today. We would qualify that assessment by noting that first, the market moves are rather modest, suggesting a low-level anxiety among investors. Second, that the pre-existing trends have mostly been extended," said analysts at Brown Brothers Harriman, in a note.

"The U.S. has threatened to use force to deter North Korea, but it prefers to use multinational efforts and sanctions. Despite the rhetoric of unilateralism, the Trump administration is attempting to find an alternative to a U.S.-North Korea confrontation," they continued. "China has taken modest steps, but it has no desire for unrest on its borders, and it fears that a united peninsula would be dominated by South Korean interests, which means the U.S."

Treasurys fell in the previous session, facing coming government supply, as well as competing corporate bond auctions, including rumors that Apple planned to unveil a large debt issue this week. Such offerings can push yields higher as investors sell Treasurys in preparation to buy richer yielding new issuance. Yields also tend to rise as under bond underwriters look to hedge against large interest-rate moves by selling their holdings of government paper.

Large U.S. firms unloaded $16.1 billion worth of debt on Monday, according to data compiled by Janney Montgomery Scott.

The rush of new corporate debt also comes amid speculation that Apple Inc.(AAPL) could bring forward a large bond offering after posting better-than-expected earnings in its third quarter (http://blogs.marketwatch.com/thetell/2017/08/01/apple-reports-earnings-ahead-of-expected-iphone-launch-live-blog/).

Traders also eyed the Treasury Department's auction for $24 billion of three-year notes as it took in enthusiastic demand, a strong showing for the first of three key debt sales this week.

(END) Dow Jones Newswires

August 09, 2017 07:57 ET (11:57 GMT)

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