Treasuries headed for the biggest weekly gain in five months as slumping commodities prices sparked speculation a slowdown in global growth will revive deflation and delay the Federal Reserve from raising interest rates early.
Benchmark U.S. government securities headed for the strongest rally since March as sliding oil prices pushed a gauge of inflation expectations toward a five-year low, enhancing the allure of fixed-income assets. The average yield on developed nation debt fell to the lowest in three months.
“Risk-off sentiment has been strong over the past couple of weeks and supporting sovereign debt,” said Tomohisa Fujiki, head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “Doubts about Chinese growth fueled concern about slackening global demand and emerging nations, which seems to have helped pave the way for a correction in Treasuries.”
The U.S. 10-year note yield fell 14 basis points this week to 2.06 percent as of 7:35 a.m. in London, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 rose 1 9/32, or $12.81 per $1,000 face amount, to 99 1/2 in the period. The yield decline is the most since the period ended March 20.
The extra yield on 10-year Treasury Inflation Protected Securities over those on similar-maturity conventional notes, a measure of the outlook for consumer prices, dropped as low as 1.53 percentage points Thursday. It declined to 1.49 percent on Jan. 14, the least since August 2010.
Crude oil prices were near their lowest in over six years.
Sovereign bonds in Australia and New Zealand surged for a second day. Australia’s 10-year yield fell eight basis points to 2.59 percent and New Zealand’s declined six basis points to 3.21 percent. Japan’s was unchanged at 0.355 percent. The average yield on developed nation bonds fell to 1.04 percent Thursday from as high as 2.39 percent in 2011.
An index of stocks around the world has sunk to the lowest since January as China’s unexpected yuan devaluation spurred concern the world second-largest economy is losing momentum. Kazakhstan, which is dependent on revenue from oil exports, abandoned control of its currency.
While concern about China and emerging markets is unlikely to stop the Fed from raising interest rates next month, they could affect policy makers’ moves in 2016, said Roger Bridges, the chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management Australia.
“I still expect the Fed to go next month and maybe another” in December, he said. “However the outlook in 2016 is probably more important, and it looks like the Fed is going to be hamstrung by the U.S. dollar and events overseas.”
Futures show the odds that the Fed will raise interest rates at its September meeting have fallen to 32 percent from a 48 percent probability at the end of last week. The gauge is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.