Treasuries Extend 2016 Winning Start With Growth Outlook Clouded

  • Fed minutes show December increase a `close call' for some
  • Economic reports highlight uneven picture for U.S. growth

U.S. Treasuries advanced for a fifth day, extending their winning start to 2016, as falling equities and oil prices added to reasons for investors be bearish on the outlook for inflation and global growth.

Gains by benchmark Treasury 10-year notes pushed the yield to the lowest in almost a month as North Korea’s claim that it tested its first hydrogen bomb and China’s move to weaken its currency spurred demand for fixed-income assets. U.S. stocks fell to the lowest in three months amid a global equity selloff as Brent crude oil dropped to an 11-year low. Long-term Treasuries extended gains after minutes of the Federal Reserve’s December meeting showed the central bank’s decision to raise interest rates last month was a “close call” for some policy makers.

"There was a little more concern over where the economy is going than investors thought," said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. "If we’re not hitting that inflation target, then Treasuries have a reason to rally."

U.S. government debt has eked out a positive return since Dec. 16, the day the Fed raised interest rates for the first time in almost a decade, amid speculation future increases will be slower than officials estimate. Economic data added to an uncertain picture confronting policy makers as separate reports Wednesday showed U.S. employers added more workers than projected in December while factory orders fell 0.2 percent.

The 10-year note yield declined seven basis points, or 0.07 percentage point, to 2.17 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, the lowest on a closing basis since Dec. 11. The 2.25 percent note due in November 2025 advanced 18/32, or $5.63 per $1,000 face amount, to 100 22/32.

Fed Minutes

The service sector expanded more slowly than forecast last month, according to the Institute for Supply Management, even as underlying gauges of orders and employment rose from the prior month.

“Some members emphasized the importance of confirming that inflation would rise as projected and of maintaining the credibility of the committee’s inflation objective,” said minutes of the Federal Open Market Committee’s Dec. 15-16 meeting, released Wednesday in Washington.

The derivatives market is pricing in about two Fed increases this year, compared with the four moves that Fed officials laid out in their latest quarterly forecasts. Interest-rate derivatives traders see the effective fed funds rate at about 0.9 percent in a year’s time. The median outlook of central bank officials is for 1.375 percent at the end of 2016.

Before the Fed minutes were released, Vice Chairman Stanley Fischer said officials’ projections for four rate increases are "in the ballpark" of probable moves this year, though slowing growth in China make it difficult to predict the path of policy.

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