U.S. Bond Yields Fall to Lowest Since 2013 as IMF Cuts Outlook

Treasuries rallied, pushing bond yields to the lowest level since May 2013, as the International Monetary Fund’s global growth outlook cut and subdued inflation fueled demand for the safety of U.S. government debt.

A $27 billion sale of three-year notes drew the strongest demand since February, with traders willing to lend cash in the repurchase agreement market to borrow the securities. Stocks tumbled and crude oil headed toward the lowest close in 17 months as the IMF warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels.

“The fear of a global slowdown is driving everything,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There is still concern about the labor market in the U.S. and the IMF coming out and downgrading their growth expectation is not comforting.”

The 30-year yield dropped eight basis points, or 0.08 percentage point, to 3.05 percent as of 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 3.125 percent note due in August 2044 added 1 18/32, or $15.63 per $1,000 face amount, to 101 17/32.

The 10-year yield dropped eight basis points to 2.34 percent, the lowest level since Aug. 29. The three-year note yield dropped five basis points to 0.94 percent, touching the lowest level in more than a month.

The Standard & Poor’s 500 Index of stocks fell 1.5 percent.

Risk Off

Trading in Treasuries through interdealer broker ICAP Plc climbed to $397 billion, from $265 billion yesterday. That compares with an average of $327 billion this year. It touched a 2014 high of $606 billion in May and a low of $146 billion in April.

“The risk-off environment is continuing with stocks weaker, putting a flight-to-quality bid in the market,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, fell to 60.44 basis points yesterday from 62.5 on Oct. 3. The 2014 average is 59.5 basis points.

The three-year notes yielded 0.994 percent at the auction, compared with a forecast of 1.004 percent in a Bloomberg News survey of six of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.42, versus an average of 3.32 for the past 10 sales.

Auction Assessment

“It was a strong auction,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, a primary dealer. “It’s one of those events that show there’s a lot of money in the system.”

Indirect bidders, a class of investors that includes foreign central banks, purchased 35.5 percent of the notes sold, compared with 33.1 percent at the Sept. 9 sale and an average of

32.8 percent at the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 17.4 percent of the notes, versus 20.3 percent at last month’s sale and an average of 18.7 percent at the past 10 auctions.

Three-year notes have returned 0.7 percent this year, compared with an advance of 4.2 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The three-year securities lost 0.1 percent in 2013, while Treasuries fell 3.4 percent.

Debt Sales

The U.S. will sell $21 billion in 10-year notes tomorrow and $13 billion in 30-year debt the next day.

The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year, the Washington-based IMF said. U.S. growth is helping lead a worldwide acceleration that’s weaker than the fund predicted 2 1/2 months ago as the outlooks for the euro area, Brazil, Russia and Japan deteriorate.

The Fed releases tomorrow the minutes of its September policy meeting in which it increased its median estimate for the federal funds rate. Traders see a 45 percent chance Fed officials will raise their benchmark rate by July 2015, fed funds futures data compiled by Bloomberg showed, down from 59.4 percent on Sept. 18, a day after Fed policy makers met. The target has been in a range of zero to 0.25 percent since December 2008.

U.S. policy makers meeting on Sept. 16-17 raised their median estimate for the fed funds rate to 1.375 percent at the end of 2015, compared with a June forecast of 1.125 percent.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE