U.S. Government Bonds Pull Back on ECB Bond News

By Min Zeng 

Treasury bonds pulled back on Tuesday as reports that the European Central Bank is considering fresh ways to stimulate the economy encouraged investors to sell haven bonds and buy riskier assets.

In recent trading, the benchmark 10-year note was 10/32 lower, yielding 2.220%, according to Tradeweb. Yields rise as prices fall.

The ECB is considering buying corporate bonds, one day after it had started buying covered bonds, which are backed by a pool of loans such as residential mortgages, and are widely considered as the safest type of debt that banks sell.

No specific plan had been discussed, one person familiar with the matter said, and there is no timetable yet for when such a step may be considered. Earlier, Reuters reported that the central bank may decide on the matter as early as December and could begin buying early in 2015.

The news "caused a risk on trade" which sent bond yields higher, said Tom Tucci, head of Treasury trading in New York at CIBC World Markets Corp. "I think this could be step one and step two will be the eventual purchase of sovereign debt around year-end."

The eurozone's struggling economy and alarmingly low inflation have been a main focus of global investors this month, which sparked broad selloffs in European and U.S. stocks last week and fueled strong demand for ultrasafe U.S. government bonds. At one point last week, the 10-year Treasury note's yield fell to 1.87%, the lowest level since May 2013.

Over the past few sessions, financial markets have shown signs of stabilization from last week's turmoil and wild price swings. Several reports out of the U.S. showed the world's No. 1 economy continuing to improve and withstanding the impact from the eurozone's woes.

Tuesday, data out of China also allayed fears that the world's second-largest economy and a large buyer of many commodities would post a sharp slowdown. The nation's economy grew by 7.3% during the third quarter. While it was the slowest pace of growth in five years, it was better than the 7.2% forecast by economists.

Traders said uncertainty over the global economy may continue to generate price swings in financial markets and keep Treasury yields at low levels. Some expect the 10-year note's yield to trade between 1.85% and 2.35% in coming weeks.

"We expect Treasury market price action to remain relatively choppy over the near-term as investors look to confirm growth momentum," said Gennadiy Goldberg, a market strategist at TD Securities in New York.

The 10-year note's yield has tumbled from 3% at the start of the year and a year-long price rally has wrong-footed many investors and strategists who expected bond yields to rise this year. Investors and traders who had bet on higher bond yields scrambled to close their positions last week.

Interest-rate strategists at Goldman Sachs Group Inc. expect the 10-year U.S. Treasury note's yield to end this year at 2.5%, down from 3% recently forecast. J.P. Morgan Chase & Co. expects the 10-year note's yield to end this year at 2.45%, down from 2.7% earlier estimated.

For the moment, the U.S. economy has fared better compared with the eurozone. The health of the U.S. economy is a key factor in determining the timing of the first interest-rate increase from the Federal Reserve.

Worries over global growth have pushed traders and investors to dial back the timing of a rate increase. The interest-rate futures market linked to the Fed's rate policy outlook expects the central bank to start raising rates in late 2015, if not later.

Bond traders and investors have dialed back expectations for the timing of the first interest-rate increase from both the Federal Reserve and the Bank of England. Some investors now believe policy makers may wait until the second half of 2015, if not longer, to raise short-term interest rates.

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