By Min Zeng
Investors pushed up government bonds in both the U.S. and Europe
while sending the dollar higher against the euro Friday, ahead of a
week that could further reinforce the diverging paths of the U.S.
and eurozone economies.
The yield on the two-year German government bond fell to a
record low below zero and the 10-year German yield declined to a
one-month low. Lower yields drove buyers into U.S. bonds, sending
the yield on the benchmark 10-year Treasury note to the lowest
level in more than three weeks. Bond yields fall when price
rise.
The dollar strengthened against the euro and approached a
seven-month high. The U.S. currency climbed to the strongest level
against the Swiss franc since 2010, and gained against many other
currencies such as the British pound, the Chinese yuan, the
Japanese yen, and the Canadian dollar.
A growing number of investors are betting that the European
Central Bank will expand its stimulus measures when officials meet
Thursday. The eurozone economy has been struggling with slowing
growth and weak inflation.
Meanwhile, a reading on the U.S. jobs market on Friday is
expected to show continued strength in the U.S., paving the way for
the Federal Reserve in December to lift benchmark short-term
interest rates from near-zero levels for the first time since
2006.
Financial-market wagers exploiting the discrepancy in
interest-rate policy have been gathering momentum over the past
month. In their respective policy meetings in October, ECB
officials signaled that the door is open for more stimulus, while
Fed officials signaled a rate increase before the end of the year
is on the table.
Investors have scooped up government bonds in the eurozone,
betting that fresh actions from the ECB would boost bond prices and
send yields lower. At the same time, many lightened up on U.S.
government debt holdings as they are concerned tightening policy
would shrink the value of outstanding bonds.
But the recent rise in U.S. bond yields has turned them into
attractive bargains relative to their peers in the developed world.
The buying interest has helped keep a lid on the rise in long-term
U.S. government bonds.
The yield on the benchmark 10-year U.S. Treasury note settled at
2.222% at 2 p.m. ET Friday in a shortened trading session after
Thanksgiving, compared with 2.232% Wednesday.
"It is highly probable that the ECB will announce new stimulus
measures at its forthcoming meeting," said Tony Crescenzi, senior
market strategist at Pacific Investment Management Co. in Newport
Beach, Calif., which had $1.47 trillion in assets under management
at the end of September.
"Low global yields continue to place downward pressure on U.S.
yields, which are high relative to much of the developed world,"
Mr. Crescenzi added.
The 10-year Treasury yield had traded above 2.3% earlier this
month. It remains very low from a historical standpoint and is only
slightly higher than 2.173% at the end of last year.
The stubbornly low U.S. long-term bond yields reflect investors'
caution against a sharp rise amid sluggish global demand, subdued
inflation, aging population, falling productivity and still highly
accommodative monetary policy around the world.
Still, many money managers don't expect the U.S. 10-year yield
to fall significantly from here either. The yield briefly dipped
below 2% on several occasions earlier this year but failing to
sustain that.
Investors say the pending shift by the Fed into tightening means
many don't see much room for the yields to fall. Besides, many
foreign central banks such as China's have been selling Treasury
debt to raise cash to support local currencies or domestic
growth.
John Canavan, market analyst at Stone and McCarthy Research
Associates in Princeton, N.J., said the 10-year Treasury yield
would only tumble sharply if the U.S. economy slips into a
recession or the U.S. stock markets suffer a large selloff.
Few expect the U.S. economy to contract any time soon.
Economists expect next Friday's data to show the U.S. economy added
205,000 new jobs last month and the unemployment rate to tumble
sharply. In recent months, there have been some signs that wage
inflation has picked up momentum.
The prospect of higher interest rates in the U.S. and lower
interest rates in the eurozone has energized investors to pile into
bets on further gains in the dollar.
One euro bought $1.0597, down 0.1% Friday. The euro has been
down more than 10% against the dollar this year.
Analysts say the ECB next week could cut some deposit rates
deeper below zero and expand its bond-buying program that started
in March.
But some money managers caution that markets could be in for
whiplash if the ECB underwhelms. Even if the ECB does deliver what
investors expect, some might rush to book profits from currency and
bond wagers.
Mark Dowding, senior fixed-income manager at BlueBay Asset
Management, which oversees $60 billions under management, said he
cashed out of his bearish bets on the euro against the dollar
during the past week.
"The euro trade is very crowded trade," said Mr. Dowding.
Markets already have largely priced in the implications of
diverging interest-rate policies between the U.S. and Europe, he
added.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
7/8% 2-year 99 29/32 up 1/32 0.922% -0.8BP
1 1/4% 3-year 100 3/32 up 1/32 1.218% -1.6BP
1 3/8% 5-year 99 29/32 up 3/32 1.646% -1.8BP
1 7/8% 7-year 100 2/32 up 3/32 1.990% -1.3BP
2 1/4% 10-year 100 8/32 up 3/32 2.222% -1.0BP
3% 30-year 100 1/32 dn 1/32 2.998% +0.3BP
2-10-Yr Yield Spread: +130.0BPS +129.8BPS
Source: Tradeweb/WSJ Market Data Group
--James Ramage contributed to this report.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
November 27, 2015 15:48 ET (20:48 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.