Ten-Year Treasuries Dearest in Two Years as Fed Liftoff Clouded

  • Futures traders have reduced probability of 2015 rate increase
  • SocGen cuts Treasury forecast, citing `disappointing' data

Ten-year Treasuries are the most expensive relative to other maturities in more than two years as a lack of clarity over the timing of the Federal Reserve’s first interest-rate increase since 2006 drives investors to the benchmark note.

The yield has remained around 2 percent this month from as high as 2.3 percent before the Fed’s Sept. 17 decision to hold off from raising rates, citing tepid inflation pressures. Futures traders cut the odds of liftoff by December to as low as 27 percent last week, after a report on Oct. 2 showed employers added fewer than 150,000 jobs in September for a second month. Even so, Citigroup Inc.’s Economic Surprise Index rose to the highest level in almost two months.

“The market sentiment has moved tremendously since September,” said Philip Marey, a senior markets economist at Rabobank International in Utrecht, Netherlands. “At the moment, the market perception is that it’s going to happen next year, and that’s why Treasury yields are so low.”

The so-called butterfly spread measuring differences in yield between the 10-year note and the five- and 30-year securities has been around minus 17 basis points this week, the lowest level on a closing basis since May 2013. The lower the number, the more expensive the center is relative to the wings. It was at minus five basis points as recently as mid-August.

The U.S. is due to sell $7 billion of 30-year Treasury Inflation-Protected Securities, or TIPS, later Thursday.

Since their September meeting, central bank officials including Chair Janet Yellen, Vice Chairman Stanley Fischer, New York Fed President William C. Dudley and San Francisco Fed President John Williams have said they still expect liftoff this year, even as governors Lael Brainard and Daniel Tarullo have argued for patience.

Measures of market volatility have declined since the Federal Open Market Committee statement on Sept. 17 that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

The VIX index of U.S. equity market turbulence has declined more than 30 percent in October, following a China-led global selloff that had wiped nearly $10 trillion from global stocks at the end of last month.

On Thursday, Mario Draghi said the European Central Bank will investigate fresh stimulus measures to boost the euro-area economy in December amid lackluster growth.

The futures market currently puts the probability of higher U.S. rates in 2015 at 32 percent, about half the odds before policy makers left the benchmark near zero in September. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

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