Treasuries Climb as China Data Weaken Case for Fed Rate Boost

  • Chinese import figures raise risk of global slowdown
  • Futures show 63% chance of Fed staying on hold through 2015

Treasuries advanced for a second day after data showing a decline in Chinese imports bolstered speculation that the Federal Reserve will delay raising interest rates until next year in the face of weakening global growth.

The probability traders assign the Fed waiting until at least 2016 to raise rates has risen to 64 percent, from 40 percent at the end of August, futures data show. China’s imports sank 17.7 percent in yuan terms in September from a year earlier, reflecting weaker commodity prices and tepid domestic demand. It was the 11th straight decline. In Europe, German investor confidence fell to the lowest in a year.

Fed Governor Daniel Tarullo, who votes on rate decisions, said Tuesday that he doesn’t currently favor an increase in 2015, breaking ranks with Chair Janet Yellen.

"This global slowdown that’s been happening is broad-based," said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of 22 primary dealers that trade with the Fed. "It’s not just China -- Europe has been in the doldrums, and U.S. data is mixed. That’s what’s driving the market."

The benchmark Treasury 10-year note yield fell four basis points, or 0.04 percentage point, to 2.05 percent as of about 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 rose 3/8, or $3.75 per $1,000 face value, to 99 19/32.

Inflation Assessment

The extra yield investors demand for holding 10-year notes, which are more sensitive to inflation, instead of two-year securities has dropped to 142 basis points, from this year’s peak of 178 basis points in July, suggesting the market sees the risk of inflation diminishing.

“The flattening Treasury yield curve reflects mounting concern about global disinflationary pressure emanating from China,” said Richard McGuire, head of rates strategy at Rabobank International in London. “With the level of private-sector indebtedness in China, a Fed rate increase could worsen the problem.”

Policy makers last month kept the Fed’s benchmark near zero, where it’s been since 2008, to assess how slowing overseas growth is affecting the U.S. Projections prepared for the September meeting showed that 13 of 17 of the central bankers saw a rate boost as appropriate this year

“Right now, my expectation is, given where I think the economy would go, I wouldn’t expect it would be appropriate to raise rates,” Tarullo told CNBC in an interview. “I want to hasten to add that that is an outlook that changes based on developments in the economy.”

The Pimco Total Return Fund said it tripled its stake in U.S. government debt over the past four months. The world’s biggest actively managed bond fund increased holdings of sovereign and related debt to about 28 percent of assets in September, according to its monthly allocation report last week. It was the highest level since February, rising from as low as 8.5 percent in May.

Treasuries returned 1.9 percent in the second half of 2015 through Monday, based on Bloomberg World Bond Indexes. The securities lost 0.2 percent in the first six months of the year.

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