Treasuries Set to Post Biggest One-Month Gain in Nearly 3 Years

As August comes to a close, U.S. Treasuries (NYSE:TLT) are set to post their biggest monthly gain since December 2008, with investors ignoring the country’s first-ever debt downgrade and instead seeking refuge from tumbling stock markets in U.S. securities.

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Weak economic data, combined with expectations of a new stimulus from the Federal Reserve, has led to a rally in Treasuries. The yield on the 10-year note is down 60 basis points this month, its biggest one-month drop since December 2008, when it fell 71 basis points. Earlier this month, the yield slid to a record low 1.97%.

However, as equities have been rising on slightly better data in the second half of August, “treasuries don’t have a big reason to rally,” said Christian Cooper, head of U.S. dollar-derivatives trading at Jefferies & Co., one of 20 primary dealers that trade with the Federal Reserve. “We had marginally positive data, which removes some of the uncertainty around payrolls.”

Government bonds are up 3.05% in August, according to a Bank of America (NYSE:BAC) Merrill Lynch index, and have climbed 7.347% this year while the S&P 500 has declined 3.23%. Breakeven rates on Treasury Inflation-Protected Securities, or TIPS (NYSE:TIP), are near their lowest level since October 2010. The breakeven inflation rate, determined by calculating the yield difference between 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity, has fallen 2% from its high this year of 2.65% reached on April 11.

Volatility in Treasuries has also picked up this month, with Merrill Lynch’s MOVE index, which measures price swings in Treasuries (NYSE:TBT) based on options maturing within two to 30 years, has averaged 99 basis points in August, and has climbed as high as 118, compared with a yearly average of 90 for 2011.