30-year paper rallies on weak inflation outlook

By William James

LONDON (BestGrowthStock) – U.S. 10- and 30-year Treasury yields hit their lowest levels since early 2009 in Europe on Monday as worries over the global growth outlook dampened inflation expectations and tempted investors into longer-dated bonds.

Data showing the Japanese economy grew at a slower pace than expected in the second quarter heightened fears over the strength of the global recovery, driving investors into assets that offer better returns than short-dated debt and more safety than stocks and other riskier investments.

“We are adjusting to a new outlook where yields are moving lower and that means real money investors have to jump in now to lock in these rates,” said Kornelius Purps, analyst at UniCredit MIB in Munich.

U.S. 10-year yields fell to a 17-month low of 2.625 percent and 30-year bonds rallied over a point in price, driving their yields to 3.777 percent, their lowest level since late April 2009.

Inflation concerns have ebbed in the wake of the generally weak global outlook, with recent data suggesting growth in the U.S. economy was stuttering, leading investors to plough into longer dated-debt in searching of higher returns.

“When yields are this low anyway you’ve got to push further along the curve… so the ultra-long end should be benefiting more,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.

The difference in yields on 10- and 30-year U.S. paper fell to its narrowest in over a week at 116 bps, as ultra-long paper outperformed slightly.

Last week, the U.S. Federal Reserve moved to soften its monetary stance and boost its flagging economy by keeping its holdings of domestic securities at a steady level instead of letting them shrink gradually.

Traders also pointed to falling swap market rates, spurred by an increased appetite to lock in current yield levels.

Thirty-year euro interest rate swaps fell to their lowest level since December 2008 at 2.953 percent. Equivalent U.S. rates also fell, hitting their lowest since April 2009 at 3.34 percent.

One trader said interest from pension funds was a key factor in the sharp drop.

(Reporting by William James; Editing by John Stonestreet)

30-year paper rallies on weak inflation outlook