Treasuries Surge Most in 3 Months as Oil Rout Spurs Safety Bid

  • 10-year note yield plunges as commodities, junk bonds tumble
  • Treasury bonds `best and safest place to hide' amid selloff

Treasuries surged, pushing 10-year yields lower by the most since September, as investors flocked to safe assets amid a selloff in oil, stocks and high-yield debt.

Benchmark 10-year yields fell even amid expectations that the Federal Reserve will raise interest rates next week. The declines accelerated after a unit of China’s central bank said market participants should focus on the yuan’s movement against its trading partners rather than the U.S. dollar, boosting speculation that the world’s second-biggest economy will let its currency cheapen even more.

"Weakening global economic activity is lowering demand," said Guy Haselmann, head of capital market strategy at Bank of Nova Scotia in New York. The "best and safest place to hide is really the Treasury market."

The 10-year yield fell 10 basis points, or 0.1 percentage point, to 2.13 percent as of 5 p.m. in New York. The yield fell 14 basis points this week, its biggest weekly decline since October. The 2.25 percent note due November 2025 rose 29/32, or $9.06 per $1,000 face amount, to 101 3/32.

Low Inflation

Traders fled the lowest-quality assets after Third Avenue Management blocked some credit mutual-fund investors from withdrawing money, a sign of mounting stress in speculative-grade markets. Crude oil fell to a seven-year low, while a Labor Department report showed wholesale prices fell 1.1 percent in November from a year earlier.

While investors are preparing for the Fed to act at its meeting Dec. 15-16, they continue to predict a slow pace of increases with the U.S. inflation rate well below its long-term average. The 10-year break-even rate fell Friday and now shows investors expect consumer costs to rise at an annual rate of about 1.48 percent in the U.S. over the next decade.

That supported prices of long-term debt, which rose more than shorter maturities. The 30-year Treasury yield fell 10 basis points, the most since July, to 2.87 percent.

Fed Move

The probability traders assign an interest-rate increase from the Fed at its meeting next week is 72 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

"The Fed at this point is poised to tighten, and it’d take something really significant to stop them," said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. "If we see the market crack and some significant move, maybe" there could be a delay, he added.

A Fed move would come even as other global central banks continue easing measures.

“The explanation for lower bond yields is central-bank buying around the world,” Steve Major, head of fixed-income research at HSBC Holdings Plc, said in an interview on Bloomberg Television. “There’s a strong disinflationary trend.”

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