U.S. government bonds and Treasuries-related exchange traded funds advanced for the fifth straight day Wednesday as mixed economic data, low inflation and foreign investors helped keep the rally going.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has an effective duration of 7.57 years, rose 0.5% over the past week while the Vanguard Extended Duration Treasury ETF (NYSEArca: EDV), which has a 24.8 year duration, gained 2.4%.
Yields on benchmark 10-year Treasuries were hovering around around 2.23%, their lowest level since October 22. The yield on 10-year notes started off at 3% at the start of the year.
Safe-haven demand helped support the Treasuries market this week after jobless claims rose to an 11-week high last week, personal spending was up at a smaller-than-anticipated pace and pending new home sales unexpectedly dipped, reports Min Zeng for the Wall Street Journal.
Meanwhile, U.S. inflation remains belwo the Federal Reserve’s 2% target for the 30th consecutive month in October, adding onto fixed-income demand – low inflation means bond investors generate a more attractive real rate of return.
“Today’s data reflected a broad-based softening in the U.S. economy in the fourth quarter, after a relatively strong performance in the third quarter,” James DeMasi, chief fixed-income strategist at Stifel Nicolaus & Co., said in the article. “With economic momentum fading, inflation will likely continue to slip further away from the Fed’s 2.0% target rate over the coming months, which will keep the Fed from raising rates until late 2015 at the earliest.”
New seven-year notes sold at auction with a yield of 1.96%, the lowest since October 2013. IEF currently has a 2.06% 30-day SEC yield.
Demand for Treasuries among foreign investors are also on the rise. Indirect bidding, a proxy gauge of demand from foreign investors, surged 50%, the highest since 2011. On Tuesday, a sale of $35 billion in five-year notes brought in 65% of indirect bidding, the highest since 2004. U.S. debt securities provide better yields than what is offered in many other developed countries. For example, 10-year Japanese government bonds yield 0.43% and 10-year German bunds yield 0.73%. [Supply, Demand Imbalance Keep Bond ETFs Afloat]
“Treasuries are too cheap to global rates,” Tom di Galoma, head of rates and credit trading at ED & F Man Capital Markets, said in the article.
The fixed-income market may have also been fueled by buying ahead of a typically slow half-day market after the Thanksgiving holiday.
iShares 7-10 Year Treasury Bond ETF
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.