Treasury 30-year bond yields tumbled to record lows as the collapse in oil and commodity prices smother inflation and hamper global economic growth.
Global sovereign yields fell to records in the U.K., France, Canada and Japan as a report showed retail sales in the U.S. slumped in December by the most in almost a year, reflecting a broad-based retreat that may prompt economists to cut growth forecasts. The slide prompted traders to push back expectations for the timing of the first Federal Reserve interest-rate increase into December less than a month after speculating that rates could rise as soon as April.
“The Fed’s between a rock and a couple of hard places.” said Daniel Fuss, Boston-based vice chairman at Loomis Sayles & Co., who helps manage the $24.5 billion Loomis Sayles Bond Fund and has been in the securities business since 1950. “The savings flows go toward safety and return, and the U.S. Treasury market has both.”
The U.S. 30-year yield dropped three basis points, or 0.03 percentage point, to 2.47 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader data. The 3 percent bond due November 2044 rose 22/32, or $6.88 per $1,000 face amount, to 111 5/32.
The yield reached a record low of 2.39 percent, breaking the previous record of 2.44 percent set on July 26, 2012. The Treasury also sold $13 billion of 30-year bonds at an auction-record-low yield of 2.430 percent.
Even at the record low yield, 30-year Treasuries are attractive to global investors looking at negative returns on the sovereign debt of nations including Germany with the European Central Bank expected to add to its bond-buying program as policy makers seek to avert deflation.
The momentum that caused the previous record to be eclipsed is being driven by the following factors:
GLOBAL SLOWDOWN THREAT: The World Bank lowered its forecast for global growth this year, as an improving U.S. economy and fuel price declines fail to offset disappointing economic data from Europe to China.
While cheaper oil fueled growth in the final months of 2014, the decline has a “sinister” side that will ripple through the economy and prompt downward revisions to forecasts by the middle of the year, Jeffrey Gundlach, co-founder of $64 billion investment firm DoubleLine Capital, said yesterday in a webcast. Stock markets may not continue their rally and yields on 10-year Treasuries may go lower before rising again, he said.
The world economy will expand 3 percent in 2015, down from a projection of 3.4 percent in June, according to the World Banks’s semiannual Global Economic Prospects report, released yesterday in Washington.
The 0.9 percent retail sales drop, the biggest since January 2014, followed a 0.4 percent gain in November that was smaller than previously estimated, Commerce Department figures showed.
LOW INFLATION: Treasury yields show traders are pricing in deflation for the next two years. The difference between yields on two-year notes and non-indexed U.S. government debt of comparable maturity, an indication of consumer prices called the break-even rate, fell to negative 0.13 percentage points, down from 1.96 percentage points in March 2014.
The Fed’s own favored gauge, the five-year five-year forward break-even rate, of long-term market inflation expectations is below 2 percent and at a 15-year low, down from 2.65 percent a year ago.
Treasuries pared gains after crude oil surged 5.6 percent today in New York, the most in more than 2 1/2 years. Crude-oil futures had fallen as much as 17 percent this year to as low as $44.20 a barrel, after plunging 46 percent in 2014 as a surge in supply around the world was met with a decline in demand.
RELATIVE RETURNS: The worldwide bond rally sent the effective yield on Bank of America’s global index of sovereign debt to a record-low 1.2 percent yesterday. Ten-year debt yields fell to 1.51 percent in the U.K., 0.65 percent in France and 0.26 percent in Japan, according to data compiled by Bloomberg.
“Yields across the globe are going down and we’re still the highest yielders, the safest place to be, and that continues to drive dollars into this market,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The bigger picture is that’s more important than anything, the amount of cash out there looking for a safe home.”
U.S. debt maturing in five years yielded more than similar maturities in 19 developed nations, according to data compiled by Bloomberg. The U.S. notes yielded 1.32 percent, while yields were negative in Finland, Switzerland, Japan and Germany.
FED TIMING: Money-market securities traders are slashing their expectations for the extent of Fed interest-rate increases for the end of this year.
Interest-rate derivatives predict the Fed’s policy rate will rise to about 0.43 percent by the end of December, about a third of the 1.125 percent rate central bank officials predicted in December, according to the median of their quarterly forecasts.
There’s a 67 percent chance the Fed will raise its benchmark rate to at least 0.5 percent by December, futures data compiled by Bloomberg show. At the end of last year, wagers were focused on a September start, according to Bloomberg calculations.