US Treasury prices recovered early losses on Friday with investors caught between the cautious message over labour markets from Fed Chair Janet Yellen and geopolitical risks from the Ukraine crisis that is hampering euro zone economic growth. The short-dated maturities along the US Treasury curve pulled back to the break-even point while the 30-year bond broke away to grind higher on market expectations any rate increases are likely a long way off and the impact will be felt more acutely on two through five-year notes.
Yellen, in the keynote speech at the annual central banker jamboree in Jackson Hole, Wyoming said the US labour markets remain hampered in their recovery from the Great Recession and therefore the Fed needs to move with caution on when to raise interest rates even as the economic data shows improvements.
Her dovish stance contrasts with some voices within the US Federal Reserve's monetary policy committee who say the Fed risks waiting too long to increase interest rates to stem inflation or the creation of asset bubbles. "I think we are splitting hairs. We cannot say she's changed sides and I don't think the market was really expecting that. I think the market was setting itself up for a more clearly dovish speech and we didn't get that," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond fund, in Baltimore, Maryland.
European Central Bank President Mario Draghi, also speaking in Jackson Hole, remained confident the euro zone will respond to June's stimulus measures but confirmed the recovery remained "uniformly weak." He promised accommodative policy for an extended period of time.
Benchmark 10-year US Treasuries rose 2/32 of a point in price to yield 2.40 percent. The 30-year Treasury, trading up 22/32 of a point in price, yielding 3.15 percent, benefited from Europe's weakness, geopolitical concerns and expectations US growth is not so robust. "The narrative suggests the market believes there won't be much sustainable growth and whatever we are getting now is simply pulling forward future growth. I cannot stress enough how much real money demand is actually supporting the 30-year," said Aaron Kohli, interest rate strategist at BNP Paribas in New York.
The 30-year bond's rise can also be tied to heightened geopolitical risk most acute along the Russian-Ukrainian border. A convoy of Russian aid trucks crossed the border without proper clearance. Washington denounced it as a flagrant violation of Ukraine's sovereignty. Western sanctions imposed on Russia and Moscow's retaliation are expected to negatively impact euro zone growth, which ground to a halt in the second quarter as Germany's economy shrank and France's stagnated. "If European growth slows, it will force the ECB to take out the big guns similar to the US quantitative easing and that is having a cascading effect and impacting the long end of the US Treasury curve," said Stith.