ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)


Treasury bonds strengthened on Monday as disappointing data out of the euro zone bolstered hopes that major central banks would keep interest rates low to support growth. The price strength was contained by upbeat reports in the U.S. housing market and China’s manufacturing industry.

In recent trade, the benchmark 10-year note was 5/32 higher, yielding 2.606%, according to Tradeweb. Bond yields fall when their prices rise.

Bond investors face new debt supply in coming days. The Treasury is expected to sell $30 billion in two-year notes Tuesday, $35 billion in five-year notes Wednesday and $29 billion in seven-year notes Thursday. A sale of $13 billion in two-year floating-rate notes is also due Wednesday.

Bond prices initially fell as a gauge of China’s manufacturing sector hit a seven-month high, which reduced fears about a sharp slowdown in the world’s second-largest economy.

Buyers stepped in after a preliminary June purchasing managers index for the euro zone–which measures activity across both the manufacturing and services sectors–fell to a six-month low of 52.8. The main weak spot was France, where activity contracted for a second straight month, and at a quickening pace.

“Stronger-than-expected data from China last night has been offset by continued weakness out of France, with the latter casting a negative outlook on the Euro region and rallying fixed income,” said Richard Gilhooly, interest-rate strategist at TD Securities.

The euro-zone data sent bond yields lower broadly in the region. The yield on the 10-year government bond in Spain fell to 2.697% while the yield on the 10-year government bond in Italy slid to 2.794%.

U.S. bonds offer superior yields compared with Germany, the benchmark for the euro zone’s sovereign debt markets, enticing investors who are seeking relative value. The 10-year German government bond’s yield fell to 1.316% Monday.

In the U.S., a report Monday showed existing home sales increased 4.9% in May to a seasonally adjusted annual rate of 4.89 million, the National Association of Realtors said. The report brightened the outlook for the housing market. Fed officials have expressed concerns about the slow pace of improvement.

Major central banks have slashed interest rates to near zero following the 2008 financial crisis. The European Central Bank earlier this month even cut one of its key interest rates below zero, aiming to spur banks to lend to consumers and businesses.

ECB President Mario Draghi suggested earlier in June that the bank is not done stimulating the economy. The International Monetary Fund has called for the ECB to launch a large-scale asset purchase program, including buying of government bonds.

Federal Reserve Chairwoman Janet Yellen said last week the U.S. central bank may keep interest rates low for a considerable period of time even as debate has grown on signs that inflation is picking up from very low levels.

Ms. Yellen described recent inflation data as being on the “high side,” but she stressed that those figures are “noisy” and that inflation is evolving in line with the central bank’s expectations.

The 10-year Treasury yield has dropped from 3% at the start of January. Bond prices have been boosted by the uneven pace of global economic growth, geopolitical risk in some developing countries and the record-low interest-rate policies of major central banks.

By Min Zeng