July 18, 2014 / 3:36 PM / 3 years ago

TREASURIES-Safety trade intact for U.S. Treasuries on geopolitical tensions

3 Min Read

NEW YORK, July 18 (Reuters) - U.S. Treasuries held steady on Friday, taking in stride a weaker-than-expected U.S. consumer sentiment survey and holding onto the safe-haven flows stemming from the escalation of tensions in Ukraine and Israel in the last 24 hours.

The preliminary July Thomson Reuters/University of Michigan reading of consumer sentiment showed an index dropping to 81.3, below both the consensus analyst expectation of 83 and the final June read of 82.5.

The data point to a U.S. economy, where consumer spending accounts for roughly two-thirds of economic activity, that is still playing it cautious even as some data show solid improvement in job creation.

"Consumers still seem pretty cautious even though job growth has accelerated and the unemployment rate has fallen. The degree of the decline in inflation expectations is notable given what we have seen with other inflation indicators," said Michelle Meyer, senior economist at Bank of America Merrill Lynch in New York.

"Consumers don't seem ready to pick up their spending in any significant way," she added.

The world remained on edge over the downing on Thursday of a Malaysian passenger jet over an area of eastern Ukraine where the government has been fighting with Moscow-backed separatists.

Israel's launching of a ground offensive into Gaza on Thursday to stop Hamas militants from firing thousands of rockets indiscriminately into Israel and to destroy their smuggling tunnel network added to the geopolitical tensions.

Benchmark 10-year U.S. Treasuries were little changed, up 2/32 of a point in price, with a yield down to 2.47 percent, according to Thomson Reuters data.

The 30-year Treasury bond was up 2/32 of a point in price, pushing the yield down to 3.28 percent. On Thursday, the yield fell to a one-year low of 3.26 percent.

The yield spread between 10-year and 2-year Treasuries is just over 200 basis points, the narrowest since June of last year.

"The data is not doing much today, even if it is slightly weaker. Clearly what is on the market's mind is the tragic events unfolding around the world as we go into the weekend and people not wanting to be exposed. We would expect a continued flight to quality," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond fund in Baltimore, Maryland.

A typical flight-to-quality move would be to send money into Treasuries in the two-year to five-year range, Stith said. However, in the current market environment, money is flowing into the longer-end of the yield curve.

Stith said this would lead to a flatter yield curve because investors are seeing the combination of low inflation expectations, signs the Federal Reserve is moving closer to tightening monetary policy and the relative attractiveness of U.S. government debt versus 10-year yields from Germany or Japan. (Additional reporting by Richard Leong in New York; Editing by Paul Simao)

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