By Min Zeng
Investors are scrambling for the safety of U.S. government
bonds, which in January notched the biggest monthly price gain in
three years, as heightened worries about global growth spread to
the U.S.
The yield on the 10-year Treasury note tumbled to its lowest
level since May 2013 on Friday following a disappointing report on
fourth-quarter U.S. growth, defying widespread expectations for
bond yields to turn higher this year. The 10-year yields was 1.679%
on Friday, down from 2.173% at the end of last year and 3.03% at
the end of 2013.
Many investors now say Treasury yields, which move inversely to
prices, have further to fall, citing not only uncertainty about the
U.S. economy but also the drag from plummeting eurozone bond
yields. Government bond yields across Europe have plunged to record
lows, with some even breaking into negative territory, as the
European Central Bank prepares a massive stimulus program to
encourage growth and inflation on the Continent. Political turmoil
in Greece has revived fears over a repeat of the 2010-2012
sovereign-debt crisis there.
It isn't only the health of the global economy that investors
are uneasy about. Further stoking their appetite for relatively
safe debt are the lackluster performance of U.S. stocks this year,
a plunge in oil prices and turmoil in currency markets stemming
from surprise central-bank actions.
Developments now unfolding in the bond market are reminiscent of
this time last year. Yields at the start of 2014 unexpectedly fell
as a severe winter crimped growth in the U.S., wrong-footing
investors who believed that an improving labor market and a winding
down of the Federal Reserve's bond-buying program would cause
yields to rise.
What many investors and Wall Street strategists failed to
anticipate this time was the sheer size of the ECB bond-buying
program announced last week. Money managers scooped up European
government debt ahead of the announcement that the central bank
would purchase at least EUR1 trillion ($1.13 trillion) worth of
bonds, and kept on buying in the wake of it.
"This hasn't been a made-in-America bull run," said David
Rosenberg, chief economist and market strategist for Gluskin Sheff
& Associates, a wealth management firm in Canada with C$8
billion ($6.3 billion) assets under management. "The bond bears got
it wrong for focusing more on domestic growth developments but it
has been the spillover from the yield meltdown in Europe that has
dominated."
Traders said the buying on Friday was broad based, ranging from
European money managers looking to snap up higher yields to U.S.
investors buying debt to match month-end adjustments by big bond
indexes.
On Friday, the yield on the 10-year German government bond
closed at a record low yield of 0.302%, compared with 0.356% on
Thursday, according to Tradeweb. The yield on the 10-year U.K.
government bond also settled at a record low of 1.337%, compared
with 1.421% on Thursday, according to Tradeweb.
A number of big banks on Wall Street still expect bond yields to
rise at the end of this year, though some of them have lowered
their prediction of how high yields could rise.
Bank of America Corp. expects the 10-year Treasury yield to rise
to 2.35% at the end of December, down from 2.75% predicted last
month. Barclays expects the yield to rise to 2.25%, down from 2.85%
predicted in November last year.
Treasurys handed investors a return of 2.19%, counting both
price increases and interest payments, in January, according to
Barclays PLC data through Thursday. That is the best monthly
performance since August 2011. For only the 10-year Treasury, the
return clocked in at 3.9%, according to Ryan ALM. In contrast, most
major U.S. stock indexes are down for the first month of the
year.
To be sure, a surprise acceleration in global growth this year
could make riskier assets such as stocks more attractive, causing
investors to shed safe-haven investments like Treasurys.
Roaring prices have delivered strong capital gains for bond
buyers. But lower yields mean buyers now have to make do with less
income from interest payments.
"There is little margin for errors with yields so low," said
David Keeble, global head of interest-rates strategy at Crédit
Agricole in New York. If there is "any change in sentiment on the
eurozone's growth or inflation outlook, U.S. bond yields could see
a rapid pace of increase."
While U.S. indicators, especially of the labor market, have
largely been rosy, some readings are prompting investors to
reassess the resilience of the U.S. economy.
U.S. gross domestic product expanded at a 2.6% annual rate in
the fourth quarter, the Commerce Department said Friday. Not only
was that half the 5% pace of expansion in the third quarter, it
fell short of the 3.2% rate of growth forecast by economists
surveyed by The Wall Street Journal.
The disappointing GDP report follows Tuesday's weak reading on
durable-goods orders.
Across the Atlantic on Friday, the eurozone reported its annual
inflation rate fell by 0.6% this month, the biggest decline since
July 2009, adding to worries about deflation. Falling prices could
cause consumers to hold back on purchases in anticipation of even
lower prices in the future, potentially creating a cycle that could
damage the economy.
"A slowdown in global and domestic economies will continue to
fuel Treasury bond rally," said Sean Simko, head of fixed-income
management at SEI Investments in Oaks, Pa., which has $249 billion
in assets under management. "The 10-year Treasury yield could
continue its move into uncharted territory if growth outlook
deteriorates."
The 10-year U.S. bond yield closed at a record low of 1.404% in
July 2012 when global financial markets were roiled by eurozone's
sovereign-debt crisis.
Write to Min Zeng at min.zeng@wsj.com
Corrections & Amplifications
Russia's central bank cut interest rates on Friday. A previous
version of this story misstated the day of the week. (Jan. 30,
2015)