U.S. sovereign bonds gained on Monday as civil unrest in Hong Kong weighed on global stock markets, and the yield curve flattened as investors bet that U.S. economic data would continue to improve.
The gains came as investors waited on Friday's highly anticipated jobs report for September for further signs that growth is gaining traction. Uncertainty around demonstrations in Hong Kong, where protesters defied volleys of tear gas and police baton charges to stand firm in the center of the global financial hub on Monday, was seen as one driver of demand for bonds.
"There is global uncertainty this morning, you've got some worrying protests in Hong Kong, overall it's quite thin and the markets are really waiting for payrolls on Friday," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
Month-end buying may also be adding to Treasurys demand, while some gains were also seen as giving back weakness from Friday, when fixed-income markets were weighed down by fears that bond behemoth Pimco may have to sell assets if redemptions increase after the departure of co-founder Bill Gross.
Volatility in rates also spiked on Friday on concerns that Pimco would unwind large positions it has taken that bet on low volatility.
"The idea was that Pimco has sold a lot of vol and they may get out of some of those positions," said Ira Jersey, an interest rate strategist at Credit Suisse in New York. A Credit Suisse index that measures volatility in swaptions increased to 62 from 58 on Friday, Jersey said.
Corporate credit remained under pressure on Monday. The yield curve between five-year notes and 30-year bonds flattened to its lowest level in over five years on Monday as investors bet that the economy will continue to gain traction.
Data on Monday showed that rising incomes helped American consumers spend more in August, a positive sign for the U.S. economy which appears to be shifting into a higher gear.