Treasuries Surge by Most in Two Months on Global Growth Concern

  • U.S. 10-year note yield tumbles to lowest level in two weeks
  • Bonds gain even as Fed official says June rate boost possible

Treasuries surged, with 10-year note yields falling by the most since March, after data from China to Europe pointed to a slowing global economy still in need of central-bank support, stoking demand for the world’s safest debt.

Benchmark 10-year yields fell to the lowest in two weeks as the European Commission cut its inflation forecast and warned of slower-than-anticipated growth across the 19-nation euro area. In the U.K., manufacturing unexpectedly shrank for the first time in three years, while data from China showed a contraction that underscored weaknesses in the world’s No. 2 economy. Treasury yields dropped even after a Federal Reserve official said U.S. financial markets may be underestimating the odds that interest rates will rise in June.

Treasuries maturing in more than one year have returned 2.5 percent this year, according to Bloomberg U.S. Treasury Bond Index data, as cooling global growth prompts investors to scale back wagers on the path of U.S. rate increases. The Fed is trying to raise rates as global peers maintain or increase stimulus. Fed officials have signaled a gradual approach to tightening policy and in March lowered their forecasts for 2016 rate increases to two from four.

"Central banks can’t spur demand," said Mike Franzese, the New York-based head of fixed income at MCAP LLC, a broker-dealer. "Investors are taking risk off the table and parking into Treasuries."

Yields Tumble

The yield on the 10-year U.S. Treasury dropped eight basis points, or 0.08 percentage point, to 1.8 percent as of 5 p.m. New York time. It fell as much as nine basis points, the biggest drop on an intraday basis since March 8, according to Bloomberg Bond Trader data. The 1.625 percent note due in February 2026 was at 98 15/32. The yield has fallen from a 2016 high of 2.29 percent on Jan. 4.

The yield on the 30-year bond, the security most sensitive to inflation expectations, fell seven basis points to 2.66 percent. That yield touched 2.22 percent in January 2015, an all-time low.

Futures indicate a 55 percent chance policy makers will raise borrowing costs by December and a 10 percent probability of an increase by the central bank’s June meeting.

‘Real Option’

“I would put more probability on it being a real option,” Atlanta Fed President Dennis Lockhart told reporters at a conference on Amelia Island, Florida, when asked about the probability futures markets assign to a June increase. “The communication of committee participants and members between now and mid-June obviously should try to prepare the markets for at least a realistic range of possibilities” for the next policy meeting.

The yield on the two-year note, the maturity most sensitive to monetary policy, closed at 0.75 percent.

"The market doesn’t believe it," said John Briggs, head of strategy for the Americas in Stamford, Connecticut, at primary dealer RBS Securities Inc., referring to a June Fed move. "Treasury yields are lower. The question is, if it continues, does it rattle the Fed to stop talking about a June meeting?"

A bond-market gauge of inflation expectations declined as global equities and crude oil fell. The gap between yields on 10-year notes and inflation-indexed securities, known as the break-even rate, shows inflation expectations averaging 1.65 percent annually over the next 10 years, below the Fed’s 2 percent target.

"Inflation will be slow to come, which argues for rates to stay contained," Briggs said.

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