- Dudley says Federal Reserve rate increase likely this year
- Bond-market inflation gauge falls to lowest since April 2009
Treasuries gained as investors sought safety amid tumbling stocks and as declining commodity prices weighed down inflation expectations.
Short-term U.S. debt underperformed longer-term securities after William C. Dudley, president of the Federal Reserve Bank of New York, said the central bank will probably boost interest rates this year. Long-term bonds benefited from losses in U.S. stock indexes as investors struggled to assess the repercussions from a rout in Glencore Plc’s shares and the scandal at Volkswagen AG. A bond-market inflation gauge known as the 10-year break-even rate fell for a seventh straight day to the lowest level since April 2009.
"We’re really on pins and needles, and flows from other asset classes have been driving markets," said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc. in New York.
The benchmark U.S. 10-year note yield dropped seven basis points, or 0.07 percentage point, to 2.10 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield has fallen 12 basis points in September. The 2 percent security due in August 2025 rose 19/32, or $5.94 per $1,000 face amount, to 98 5/32.
Dudley, in an interview with the Wall Street Journal, said the central bank will probably boost interest rates from near zero this year, though he said economic growth may be cooler in the second half of 2015. The Fed refrained from raising rates on Sept. 17, citing increasing international risks to the economy.
Two-year Treasuries rose less than 30-year debt, with the difference between the two yields narrowing to 2.2 percentage points. Short-term debt is seen as more sensitive to Fed policy, while long-term debt is seen as more sensitive to inflation expectations.
"It’s a global commodity slowdown, and you have Dudley saying we’re going to hike anyway," said Ian Lyngen, a government bond strategist with CRT Group LLC in Stamford, Connecticut. "That’s why the front end of the curve is underperforming."
Global stocks are poised for their worst quarter since 2011 after signs of a weakening Chinese economy stoked a rout in financial markets last month. The Bloomberg Commodity Index has slumped 26 percent in the past year, even after rising from its August low.
Traders see a 41 percent probability that the Fed raises rates by the end of this year, down from 60 percent a month ago, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.