Treasuries’ Weekly Rally Signals Doubts About Fed’s Path Forward

  • U.S. debt gains on report of weak second-quarter growth
  • Traders push off bets on next Fed increase into next year

Treasuries posted a weekly advance, with two-year notes snapping the longest slide since May, as a report showing tepid U.S. economic growth dimmed bets on a Federal Reserve interest-rate increase in the coming months.

Yields fell, led by shorter maturities, as data Friday showed the world’s biggest economy grew at a 1.2 percent annualized rate in the second quarter, less than half the median forecast of a 2.5 percent pace.

The result darkens economic prospects at a time officials are looking for sustained improvement that’d justify another rate increase, following liftoff from near zero in December. The central bank left rates unchanged this week and said “near-term risks to the economic outlook have diminished,” while pledging to stick to a gradual pace of tightening.

"Some of the positive data earlier in the week and the FOMC statement had people starting to think maybe there’s some glimmer of hope the Fed could tighten as early as September, but the GDP data should reverse that movement in sentiment," said Thomas Simons, senior money-market economist in New York at Jefferies LLC, one of the 23 primary dealers that trade with the Fed.

Weekly Gain

Benchmark Treasury 10-year note yields fell five basis points, or 0.05 percentage point, to 1.45 percent as of 5 p.m. in New York, Bloomberg Bond Trader data show. The yield dropped 11 basis points this week, driving it back toward the record low of 1.32 percent reached July 6.

Yields on two-year debt, more sensitive to expectations for Fed policy, dropped five basis points this week, to 0.66 percent, after rising the past three weeks as traders ramped up bets on a rate hike by year-end.

The market-implied probability of a Fed increase by the end of 2016 dropped to 34 percent, from 45 percent Thursday, according to futures data compiled by Bloomberg. It’s not until September of next year that the likelihood exceeds 50 percent. Policy makers release their next decision on Sept. 21.

Treasuries dropped earlier, along with many sovereign debt markets worldwide, as the Bank of Japan expanded its purchases of exchange-traded equity funds, while refraining from making a deeper cut to its negative interest rate or increasing the amount of government debt it buys. The step fell short of what some traders were expecting from the BOJ as it seeks to boost growth and reduce the risk of deflation. Japanese benchmark 10-year bonds sank the most in three years.

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