Treasuries Lead Sovereign Bond Gains

Treasuries have recently been the leaders of the sovereign bond rally in the early trading of 2015, even as the FOMC is expected to start hiking rates later in the year. Fear factors, and there are many, have been driving investors into bonds, and particularly into the safety of Treasuries, since Christmas. The latest surge in prices have come following the terrorist attacks in Paris. Other bullish factors will be growth angst, deflation worries, falling oil prices, fiscal policies and monetary policy stimulus.

Global sovereigns ended the first full week of trading on a bullish note as bond markets around the world posted yields declines, with Greece, Spain, Portugal, and Italy the major. The 10-year Treasury fell 9 bps on Friday to test 1.94%, which tied the lowest rate since May 2013. The 23 basis point decline for the year-to-date was the largest across developed markets.

U.S. Treasuries are getting off to the best start in 17 years, despite indications of solid growth and expectations of Fed rate liftoff. Underpinning the bullish twist have been safe haven flows, tumbling oil prices and falling inflation expectations, demand for yield amid widening spread to core sovereigns in Europe and Asia, and spillover from overseas where rates are falling on expectations of QE from the ECB.

However, it was the 0.2% decline in wages in the December employment report, and downward revisions to 0.2% in November from the prior 0.4% that helped catalyze the move on Friday as it tempered market fears of an acceleration in Fed rate liftoff. The yield curve resumed its flattening too as the 10-year outperformed.

December retail sales, which is scheduled to be released on Wednesday will be anxiously awaited for clarity on the holiday season. The median forecast is for a modest 0.1% gain for the headline, and no change for the ex-auto component. Import and export prices, which is also scheduled for Wednesday, should reflect the ongoing declines in energy and other commodity prices, with import prices seen plunging 2.9% while export prices slid 0.4%. The Empire State and Philly Fed manufacturing surveys which isschedule for Thursday will be some of the freshest data to begin the New Year.

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