Treasuries advanced, pushing 30-year bond yields to the lowest level in almost two months, as a rout in Chinese stock markets fueled demand for haven assets.
U.S. debt extended gains after a report showed shipments of certain durable goods lagged behind forecasts, muddying the outlook for second-quarter U.S. economic growth, scheduled to be released this week. Crude oil prices extended declines into bear-market territory as the Federal Reserve begins a two-day meeting Tuesday to decide on its next interest-rate increase.
“The weak price action in the equity markets caused a rally in Treasuries,” said Shyam Rajan, head of U.S. rates strategy at Bank of America Corp.in New York, one of the 22 primary dealers that trade with the Fed. “You could get a focus back on the U.S., given the Fed meeting and the gross doemstic product data this week.”
The benchmark U.S. 10-year note yield fell five basis points, or 0.05 percentage point, to 2.22 percent as of 4:59 p.m. in New York, according to Bloomberg Bond Trader data. The 2.125 percent security due in May 2025 rose 3/8, or $3.75 per $1,000 face amount, to 99 6/32.
Rajan said he is neutral on Treasuries after ending a yield-curve-flattening trade and expects the 10-year yield will climb to 2.35 percent by year-end.
The yield on the 30-year bond touched 2.91 percent, the lowest since June 1.
The Shanghai Composite Index plunged 8.5 percent at the close, the most since 2007. Crude oil declined as much as 2 percent in New York to $47.20 a barrel.
The gap between yields on 10-year Treasury inflation protected securities and equivalent nominal debt narrowed to 1.73 percentage points, the least since March 31. Known as the break-even rate, it forecasts expectations for inflation over the next 10 years.
Durable goods orders rose 3.4 percent in June, compared with a 3.2 percent forecast in a Bloomberg News survey. Shipments of nondefense capital goods exclusing planes fell 0.1 percent compared with a forecast for a 0.6 percent rise.
Slowing growth in China “could force an economic slowdown in the rest of the world, including the U.S.,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets.
The difference between yields on two-year notes and the 30-year bond was 2.28 percentage points, touching the least in almost two months, amid declining expectations for economic growth as the Fed looks to raise rates.
The U.S. economy grew 2.5 percent at an annual rate 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.
There is zero chance the Fed will raise rates at the July meeting, according to the median probability in a Bloomberg survey of 46 economists. The likelihood of a rate increase in September are 50 percent, the July 20-22 survey found.
“People are a bit more concerned the Fed won’t be able to signal on Wednesday that they are confident of a rake hike for 2015,” said Edward Acton, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. The Fed has to take into account “the global consequences of rate hikes and how that affects the global economy,” he said.
Acton said he recommends investors buy five-year securities in “what could be a dovish moment for the Federal Open Market Committee in their minutes,” he said.