Treasury yields fell sharply on Monday, extending their monthlong slump, as investors snapped up U.S. government paper before the end of the year.
The Securities Industry and Financial Markets Association recommends the bond market to close early on Monday, at 2 p.m. Eastern, ahead of New Year’s Day.
The 2-year Treasury note yield TMUBMUSD02Y, +0.00% fell 3.8 basis points to 2.496%, its lowest since June 8. The short-dated maturity fell 32 basis points this month, its largest such move since Nov. 2008.
The 10-year note yield TMUBMUSD10Y, +0.00% slipped 5.5 basis points to 2.684%, its lowest finish since Jan. 26, extending its recent decline to 33 basis points, its largest such move since June 2016. Meanwhile, the 30-year bond yield TMUBMUSD30Y, +0.00% was down 2.8 basis points to 3.019%, adding to a decline of 29 basis points in December, its largest such move since June 2016. Bond prices move in the opposite direction of yields.
On an annual basis, the 10-year note yield and the 30-year bond yield advanced nearly 28 basis points, both marking their biggest yearly rise since 2013. The 2-year note yield, sensitive to the Federal Reserve’s rate increases, more than doubled the rise of its longer-dated counterparts, climbing around 61 basis points.
Though 2018 was billed as the year for the bond bears, Treasury yields retraced much of their earlier rise, but still traded higher compared with the year’s start. Fears around wage inflation and fiscal stimulus gave way to U.S.-China trade concerns and a selloff in risk assets, which spurred a late-year rally in U.S. government paper.
Analysts suggested higher bond prices on Friday may have come on the back of month-end buying as money managers snap up government paper to maintain the average maturity of their portfolios before the end of December. When debt rolls off a bond fund portfolio, the average maturity of the portfolio will fall, drifting away from the maturity of their benchmark index.
“It’s last-minute buying at the long-end in thin liquidity conditions,” Jim Vogel, interest-rate strategist at FTN Financial, told MarketWatch.
He also said the decline in the Dallas Fed manufacturing gauge underlined how falling oil prices were taking a toll regional economic growth, a spur to further bond buying. The Dallas Fed manufacturing index fell sharply to -5.1 from 17.6, suggesting weaker oil prices had softened industrial activity in energy-reliant Texas.
What’s more, the slump in crude may heighten fears that falling demand for commodities could reflect a global economic slowdown. Against this dour backdrop, the Fed may struggle to press for further rate increases.
“It will be difficult for the Fed to continue to come across as hawkish at the bottom line because the longer global demand drifts away from crude, the longer that financial conditions don’t get easier,” said Vogel.
President Donald Trump said in a Saturday tweet that a telephone call between him and China’s leader Xi Jinping had made advances toward a deal. Yet The Wall Street Journal reported that Trump may be exaggerating progress on trade talks, according to people familiar with the negotiations.
Meanwhile, a government shutdown is on track to roll over into 2019, as Trump and congressional Democrats remained at loggerheads over demands for border-wall funding.