Treasuries Have Best Start Since ’03 as Growth, Brexit Curb Fed

Simon Derrick: Negative Rates, Brexit, and Currencies
  • U.S. government debt has returned 4.8% this year, index shows
  • All 77 economists surveyed say Fed will hold rates Wednesday

Treasuries are in the midst of their best start to a year in more than a decade as flagging global economic growth and the prospect of Britain exiting the European Union boost demand for haven investments.

Benchmark 10-year note yields fell Wednesday before the Federal Reserve concludes a policy meeting. Treasuries have returned 4.8 percent in 2016, the most at this stage of the year since 2003, based on Bank of America Corp.’s U.S. Treasury Index. Futures prices showed zero chance of a Fed interest-rate increase this week, and the probability of a move this year has declined to about 49 percent, from 74 percent at the end of May.

The U.S. debt rally got a boost this month after a June 3 report showing the weakest job creation in almost six years. Since then, the prospect of a Brexit that may unleash market turmoil globally has benefited haven assets, with German 10-year bond yields falling below zero for the first time on record on Tuesday. Fed Chair Janet Yellen, who signaled in a speech last week that the central bank is in no rush to raise rates, will give a press conference Wednesday after officials release their statement.

“We are anticipating the Fed expecting two rate hikes over 2016 -- that could change,” said Krishna Memani, chief investment officer at OppenheimerFunds, said in an interview on Bloomberg Television. “Risks have risen in the marketplace, and the economy may be slowing down in various spots, and as a result, they may be looking for one rate hike. If that is Janet Yellen’s dot plot, that will be the real story.”

Fed Forecasts

All 77 economists surveyed by Bloomberg predict the Fed will keep the upper range on the target for its benchmark interest rate at 0.5 percent following Wednesday’s meeting. The Fed will update its quarterly interest-rate projections, known as the dot plot.

U.S. 10-year yields fell two basis points to 1.59 percent as of 12:01 p.m. in New York, according to Bloomberg Bond Trader data. The yield slid to 1.57 percent on Tuesday, the lowest in four months. The price of the 1.625 percent security due in May 2026 was 100 9/32.

The yield on two-year notes, the coupon maturity most sensitive to changes in Fed policy, fell one basis point to 0.71 percent. The gap between yields on two- and 10-year securities, a measure of the yield curve, fell to about 88 basis points, the flattest since 2007.

“We have a Treasuries yield curve that’s clearly reflecting that expectation of lower-for-longer rates, and is also clearly being influenced by global capital flows,” said William Northey, who helps oversee $125 billion as chief investment officer in Helena, Montana for U.S. Bank’s private client group. “We’re receiving a lot of capital flows from around the world right now, which is influencing how low our rates have moved.”

Global Yields

Data from the Fed showed industrial production fell more than forecast, as American producers continue to battle the fallout from a plunge in energy prices that has sapped investment appetites. Wholesale prices climbed in May, Labor Department data showed, even as prices excluding volatile components such as food, energy and trade services declined for the first time in seven months.

Germany’s 10-year bund yield was little changed at 0.003 percent, after sliding on Tuesday to a record minus 0.033 percent. Yields throughout the Japanese market pushed toward all-time lows, with the 10-year falling to minus 0.195 percent. Britain’s 10-year gilt yield reached an unprecedented 1.11 percent on Tuesday, and rebounded to 1.19 percent on Wednesday.

“Earning minus half a percent in cash is less good than earning zero percent in a government-bond yield,” said Laurence Mutkin, London-based head of Group-of-10 rates strategy at BNP Paribas SA, in an interview on Bloomberg Television. “As long as central banks need to ease, you can expect these yields to stay negative or go more negative. This is what we have to get used to.”

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