Treasuries advanced amid speculation Federal Reserve officials will refrain from signaling an interest-rate increase is likely to come as early as September when they meet this week.
Such a message from the central bank would be good news for bonds, according to strategists at Nomura Holdings Inc. and Morgan Stanley, two of the 22 primary dealers that trade directly with the Fed. Adding to the gains on Monday was demand for haven assets as a rout in Chinese stock markets resumed.
Treasuries are going to be “strong like a bull,” George Goncalves, Nomura’s New York-based head of rates research, wrote in a report July 24. The Fed “does not have enough facts to signal hikes are near.” The U.S. central bank holds a two-day policy meeting starting Tuesday.
Large speculators including hedge funds hold more 10-year futures contracts that benefit from gains than ones that profit from losses for the first time in 10 months. The so-called net long position of 27,400 contracts last week was the most in two years, based on Commodity Futures Trading Commission data. Fed Chair Janet Yellen won’t act until later in the year, based on futures data compiled by Bloomberg.
The benchmark U.S. 10-year note yield fell three basis points, or 0.03 percentage point, to 2.24 percent as of 8 a.m. in New York, according to Bloomberg Bond Trader data. The 2.125 percent security due in May 2025 rose 1/4, or $2.50 per $1,000 face amount, to 99 1/32. The Shanghai Composite Index plunged 8.5 percent at the close, the most since 2007.
The Fed will hold off on raising rates until the beginning of 2016, DZ Bank AG said. Economic data isn’t strong enough to warrant moving in September and liquidity will be too challenging come December, according to Birgit Figge, a fixed-income strategist at the Frankfurt-based lender.
Before the Fed’s policy statement is announced, investors will be watching whether fresh data might bolster the central bank’s view that rates can be raised this year. The U.S. economy grew 2.5 percent in the second quarter, after contracting in the first three months of the year, according to the median estimate of analysts before the data are published this week. Durable goods orders rebounded in June from a decline the previous month, economists forecast in a separate survey.
If Fed officials don’t signal rates will change soon in the statement of this week’s meeting, Treasuries will rise, DZ’s Figge said. In the next month, the 10-year yield will drop to 2 percent, Figge forecast.
“If we are right, and the Fed will not change the Fed statement, the market will revise the interest-rate expectation,” Figge said. “However it is also clear that an interest-rate increase will happen soon. At the end of the year we see rising yields again.”
Investors should move their money to five- to 10-year Treasuries and out of notes due in three to five years, Morgan Stanley said in a report July 24. Longer maturities tend to rally more than short-term debt when yields fall.
“We do not expect the Fed to pre-signal a September hike in the July statement,” Morgan Stanley analysts including Matthew Hornbach, the head of global interest-rate strategy in New York, wrote in the report.
While the views of Nomura, Morgan Stanley and DZ Bank paint a rosy picture of the Treasury market, Bloomberg surveys of economists show the majority expect prices to fall.
Ten-year yields will climb to 2.53 percent by Dec. 31, based on the responses. An investor who bought today would lose about 1.4 percent if the projection is accurate, data compiled by Bloomberg show.
The odds of a U.S. rate increase this month are 4 percent, rising to 71 percent by December, according to data compiled by Bloomberg based on futures.