Treasury Yields Have Fallen as Fed Prepares to Increase Rates

  • U.S. securities are heading for best week in more than a month
  • Expectation for global recovery receding, Mizuho Asset says

The Federal Reserve is getting ready to raise interest rates -- and Treasury yields are surprising analysts by falling.

This is turning out to be a year that few predicted in the world’s biggest bond market. In January, a Bloomberg survey of economists projected yields would climb through the course of 2015 as the Fed ended its zero-rate policy. Instead, the benchmark yield is declining as investors question how quickly the central bank can move against a backdrop of slow inflation and a stuttering global economy.

Even as yields rose on Friday before key jobs data, Treasuries are still poised for their the steepest weekly advance in about a month and an half, according to Bloomberg bond indexes. The Labor Department’s monthly payrolls report Friday will show average hourly earnings growth slowed to 0.2 percent in September, from 0.3 percent the previous month, based on a Bloomberg survey. Nonfarm job gains totaled 201,000, compared with 173,000 in August, economists predicted.

“We expect the payroll data to be decent, but even that is unlikely to trigger a heavy sell-off in Treasuries,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt. The “growth picture suggests the Fed is probably ready to raise interest rates, but inflation data doesn’t quite catch up. External troubles are also keeping policy makers cautious and that provides support for Treasuries.”

Yield, Inflation

Ten-year Treasury yields rose one basis point, or 0.01 percentage point, to 2.05 percent as of 7:29 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 fell 3/32, or $0.94 per $1,000 face amount, to 99 17/32. Yields rose 11 basis points from last week.

The yield dropped to a five-week low of 2.01 percent Thursday. At the start of this year, analysts had predicted it would increase to 2.65 percent by the end of the third quarter.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has shrunk to 1.46 percentage points from this year’s high of 1.97 set in April. China has been the biggest source of anxiety for investors, after turmoil in the nation’s financial markets fueled concern that an economic slowdown is deepening.

Yields are falling even as Fed officials try to prepare investors for a rate increase. San Francisco Fed President John Williams said Thursday risks to the economy from developments abroad haven’t worsened and domestic conditions remain positive, while repeating his call to raise rates this year. Chair Janet Yellen and New York Fed President William Dudley have also argued for a shift this year in speeches following the latest policy meeting Sept. 16-17.

There’s an 18 percent chance the Fed will move by its October meeting, according to futures data compiled by Bloomberg. The odds are 44 percent by the following session in December. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.

Friday’s employment report may change those odds, said Kim Youngsung, head of overseas investment in Seoul at the Government Employees Pension Service, which has $12.7 billion in assets.

“The Fed’s dependent on the data,” he said. “If it’s better than expected, then it’ll be easier to raise interest rates in October. If it’s weaker than expected, December will be more likely.”

Economists are sticking with their forecasts for yields to rise. The 10-year yield will climb to 2.43 percent by year-end, according to Bloomberg surveys with the most recent forecasts given the heaviest weightings.

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