(Bloomberg) -- Treasury 30-year bonds have returned more than double that of U.S. stocks this year before the governments monthly sale of its longest maturity today.
Long bonds advanced 16% in 2014 through yesterday, based on Bank of America Merrill Lynch data. The Standard & Poors 500 Index gained 6.7% including reinvested dividends, according to data compiled by Bloomberg. Demand rose at a sale of 10-year notes yesterday. Unrest in Ukraine and Gaza combined with uneven U.S. economic growth are driving demand for the relative safety of government debt.
As we have progressed through the year, a lot of flattening trades have been put on in anticipation of the Federal Reserve raising interest rates sooner than investors expected, said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. Longer-dated bonds have also benefited from a combination of trades out of riskier bond classes and flight to safety. A flattening trade is a bet longer-dated yields will fall faster than those on securities with shorter maturities.
U.S. 30-year yields were little changed at 3.24% at 7:05 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 3.375% bond due in May 2044 was 102 18/32. Ten-year notes yielded 2.42%.
Thirty-year yields will rise to 3.5% by year-end and 10-year rates will reach 2.7% as long as there is no derailment of the U.S. recovery, ADMs Ostwald said.
BOND AUCTION
The U.S. is scheduled to sell $16 billion of 30-year debt today. The bonds yielded 3.25% in pre-auction trading. At the previous auction of this maturity on July 10, investors submitted orders to purchase 2.4 times the amount of debt available, in line with the average for the past 10 auctions. Indirect bidders, the investor class that includes central banks outside the U.S., purchased 53.2% of the securities, the most in eight years.
Yesterdays $24 billion sale of 10-year notes attracted bids for 2.83 times the amount offered, up from 2.57 times in July.
A $27 billion sale of three-year securities on Aug. 12 drew the lowest yield since April at the monthly auctions.
Treasuries advanced yesterday as the government reported U.S. retail sales stalled in July, the weakest performance in six months.
Economists say reports today will show the cost of imported goods fell in July and initial claims for jobless benefits increased last week, based on Bloomberg News surveys.
RUSSIA WARNED
The U.S. and the European Union have warned Russia against using aid as a pretext for military intervention in Ukraine. Israel and Gaza Strip militants agreed to extend a truce. American soldiers flew to a mountain in Iraq where they found fewer trapped civilians than expected, making it less likely the U.S. will conduct a rescue, Defense Secretary Chuck Hagel said.
Weve been really concerned about geopolitical risk, said Kim Youngsung, head of overseas investment in Seoul at South Koreas Government Employees Pension Service, which has the equivalent of $3.89 billion in assets. That will impact the global economy and U.S. bond yields.
Kim said hed prefer to have 10-year yields closer to 3% before buying Treasuries. That may happen later this year with the Federal Reserve on course to end the bond purchases it has used to support the economy, he said.
INFLATION EXPECTATIONS
The longest maturity Treasuries are benefiting from signs inflation is being contained.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.23 percentage points. The average for the past decade is 2.20.
Average hourly earnings increased 2% in July from a year earlier, failing to recover from the recession that began in December 2007 and ended in June 2009, government data showed this month. Earnings growth was as high as 3.6% in 2008.
Shorter-term Treasuries havent fared as well. They tend to track what the Fed does with its main interest rate, the target for overnight loans between banks, and investors are betting policy makers will increase the benchmark next year.
Treasuries due in two years have returned 0.6% this year through yesterday, the Merrill Lynch indexes show.
Theres about a 75% chance the Fed will increase its benchmark to at least 0.5% by October 2015, futures contracts indicate. The central bank has held its target for the rate in a range of zero to 0.25% since December 2008.
Will Tseng, a bond fund manager in Taipei at Mirae Asset Global Investments Co., said he prefers emerging-market corporate bonds, and to a lesser extent, emerging sovereign debt in countries including Mexico, Brazil and Sri Lanka.
For the past few weeks, Ive had credit product instead of Treasury bonds, he said. Risky assets have been sold due to geopolitical uncertainty. These uncertainties will not have a real impact on the recovery pace. The growth momentum is still the same in the global environment. Mirae had $58.7 billion in assets as of Dec. 31.
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