- Fixed-income assets given boost as oil slips below $30
- Odds of Fed rate increase by April meeting fall to about 31%
Treasuries advanced for a fourth day as Chinese stocks fell back into a bear market and wiped out gains from a state rescue campaign, fueling demand for haven assets.
Ten-year note yields touched the lowest since October before a report on Friday that’s forecast to show U.S. retail sales contracted for the first time in three months in December, highlighting dangers to the economic recovery. Treasuries due in 10 years or longer have earned 2.5 percent this year, after a loss of 1.1 percent in 2015, as concern China is slowing boosts demand for safer assets and prompts speculation falling commodity prices will depress inflation.
Treasuries advanced with their German counterparts as Brent crude slipped below $30 a barrel to the lowest since February 2004. Demand for U.S. bonds has been supported as investors reduce wagers on a boost to interest rates this year, with futures showing the odds of an increase by the Federal Reserve’s April meeting falling to about 31 percent, from 56 percent at the end of 2015. St. Louis Fed President James Bullard said Thursday the decline in crude prices may delay the return of inflation to the 2 percent target.
“The China story is the main thing,” together with oil, said Philip Marey, a senior U.S. rates strategist at Rabobank Groep in Utrecht, Netherlands. “You even see it in the remarks by Fed speakers. At the beginning they were very complacent about the outlook. Now they’re acknowledging the downward risks to the inflation outlook, and that’s being reflected in the Treasury yields at the longer end.”
The benchmark Treasury 10-year note yield declined five basis points, or 0.05 percentage point, to 2.04 percent as of 7:42 a.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent security due in November 2025 rose 13/32, or $4.06 per $1,000 face amount, to 101 27/32. The yield has dropped eight basis points this week and touched 2.03 percent earlier, the lowest since Oct. 28.
Rabobank’s Marey sees the yield falling to 1.75 percent by the third quarter, before rebounding to 2 percent by the end of the year. The median of 66 analysts’ predictions compiled by Bloomberg is for the yield to end 2016 at 2.75 percent. The forecasts range from 1.45 percent to 4 percent.