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Treasury Bonds Post 4th Straight Weekly Price Gains

Investors Sought Safety From a Continued Selloff in Stocks and Emerging-Market Currencies

By

Min Zeng

Updated Jan. 24, 2014 4:32 p.m. ET

U.S. Treasury bond prices strengthened Friday, capping the longest weekly price rally in nine months, as investors sought safety from a continued selloff in stocks and emerging-market currencies (A SAFE HAVEN ARGUMENT - HAPPENS OFTEN, ALSO REFERRED AS A 'FLIGHT TO SAFETY.')

The buying sent the benchmark 10-year note's yield to a two-month low of 2.704%. The yield, a key benchmark to set long-term borrowing costs for consumers and businesses in the U.S. and abroad, has fallen from 3.03% at the end of last year, the highest level since July 2011. When bond prices rise, their yields fall.

In late-afternoon trading, the benchmark 10-year note was up 12/32 in price compared to the level late Thursday, yielding 2.728%, according to Tradeweb. The yield fell about 0.09 percentage points for the week, a fourth straight weekly decline.

Among key drivers sending bond yields lower: some disappointing data deflating optimism that the U.S. economy would accelerate; growing concern about the health of China's economy and the country's nonbank financial institutions that have played a major role in fueling lending; a broad selloff in emerging-market currencies amid flagging economic growth and political and social turmoil in some countries.

"There has been a shift to risk-off mode across the global markets that's boosting demand for safe-haven Treasurys," said Guy LeBas, chief fixed-income strategist at Janney Capital Markets.

The decline in bond yields this month surprised many investors and traders who have predicted Treasury yields would extend last year's increase. THE (MANY) INVESTORS ARE BEARS, BETTING ON PRICES FALLING, YIELDS RISING - THEIR FUR IS BURNING! MORE ON THIS LATER. Economic data in December have signaled the growth momentum has gained traction, driving the Federal Reserve to start dialing back its bond buying by $10 billion to $75 billion this month. Fed policy makers have signaled they would continue to reduce bond purchases, unless economic growth falters. ALL 'EYES' WILL BE ON FED AND THE FOMC MEETING THIS COMING TUESDAY AND WEDNESDAY (1/28 - 1/29)

"Many investors were caught off guard with the recent negative shocks,'' said Sean Simko, head of global fixed income management at SEI Investments. "There are too many lingering uncertainties for yields to sharply move higher."

Treasury bonds have handed investors a gain of 0.95% this month through Thursday in total return, which includes price appreciation and interest payments, after a loss of 2.75% in 2013, according to Barclays. VERY NICE, TWO PARTS TO RETURN ON BONDS - CHANGE IN PRICES AND INTEREST PAYMENTS. LAST YEAR, BOND INVESTORS GOT HAMMERED BY CAPITAL LOSSES GIVEN THE FALLING BOND PRICES (HIGHER YIELDS). THIS YEAR SO FAR, CAPITAL GAINS ALONG WITH INTEREST PAYMENTS.. The Standard & Poor's 500 stock index has declined 2.3% in prices after a rally of nearly 30% last year. THIS IS THE EXACT OPPOSITE OF LAST YEAR.

Tom di Galoma, co-head of fixed income rates trading in New York at ED&F Man Capital Markets, said a further selloff in stocks and emerging-market assets and more disappointing U.S. data would mount pressure on the Fed to possibly delay further reductions in bond buying, which could send bond yields lower still. THIS IS THE UNCONVENTIONAL GAS PEDAL - IF YOU THINK THE FED MIGHT DELAY THE TAPER, BE A BULL ON BONDS (GO LONG!!)

For the moment, many analysts and economists still believe the Fed will announce a further $10 billion reduction in bond buying after its next planned policy meeting on Jan 28-29. They argue the recent soft data may have been driven by bad weather and wouldn't derail the pace of the economic growth this year.

"I think investors still expect the economy to recover and the Fed to continue to taper, but are concerned that those expectations may not be met,'' said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. YES, THE FOMC MEETING HAS ADDED MEANING GIVEN THE SELL - OFF. TELL STORY ABOUT THE TAIL WAGGING THE DOG AND THE 'BERNANKE PUT.'

The International Monetary Fund raised its global economic growth outlook for the year on Tuesday, with expansion fueled by the U.S., euro zone and Japan. The IMF raised its 2014 forecast to 3.7% growth, up 0.1 percentage point from its previous outlook in October.

Wagers on bond yields rising this year had climbed at the end of 2013. But the decline this month in bond yields have forced investors and traders to cover those short positions. By doing so, they have been buying Treasury bonds. VERY NICE AGAIN - WHEN YOU SHORT BONDS - YOU BORROW AND SELL IMMEDIATELY, HOPING OF COURSE THAT BOND PRICES FALL SO YOU CAN BUY LOW AND COVER YOUR SHORT POSITION WITH A PROFIT. HOWEVER, WHEN PRICES ARE RISING, LIKE THEY HAVE FOR THE LAST FOUR WEEKS, THE FUR ON THESE BOND BEARS STARTS TO 'BURN' SINCE WITH EVERY UP TICK IN PRICE, THEY ARE LOSING MONEY. IF THEY GET REALLY SCARED THEY COVER THEIR SHORT POSITIONS BY BUYING BONDS CAUSING MORE FUR TO BURN - SO PART OF THIS RECENT RALLY IS DUE TO THE BEARS COVERING THEIR SHORT POSITIONS SINCE THEY PLACED BIG BETS ON THE FED TAPERING - IF WE UNDERSTAND THIS, THEN WE ARE DOING JUST FINE!

"It is a positioning purging,'' said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York.

Mr. Goncalves said bond yields could rise again if data in coming weeks suggest the economy "is still on track for growth." But he said that "for now we tell clients don't fight" against the decline in yields.

COUPON ISSUE PRICE CHANGE YIELD CHANGE

1/4% 2-year 99 26/32 up 1/32 0.348% -1.2BP

3/4% 3-Year 100 1/32 up 2/32 0.737% -2.4BP

1 1/2% 5-year 99 23/32 up 5/32 1.561% -3.1BP

2 3/8% 7-Year 101 6/32 up 7/32 2.187% -3.6BP

2 3/4% 10-year 100 6/32 up 12/32 2.728% -4.6BP

3 3/4% 30-year 101 29/32 up 22/32 3.644% -3.8BP

2-10-Yr Yield Spread: +238.0 BPS Vs +241.5 BPS

Source: Tradeweb

Write to Min Zeng at min.zeng@

DISCUSS THE NUMBERS AND WHAT WE MEAN BY BONDS SELLING AT A DISCOUNT, PAR, AND PREMIUM. ALSO, MENTION SLOPE OF YIELD CURVE AND ITS HISTORY OF SIGNALING FUTURE ECONOMIC ACTIVITY.

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