Treasury 2-Year Yields Fall by Most Since 2013 on Rate Outlook

Treasuries climbed, with two-year note yields dropping the most in more than a year, as signs of economic weakness in Germany fueled speculation that slowing global growth will delay Federal Reserve interest-rate increases.

Thirty-year bond yields dropped below 3 percent for the first time since May 2013 as reports showed U.K. inflation dropped to a five-year low in September and German investor confidence eroded. A gauge of inflation expectations measured by the difference between yields on 10-year notes and similar-maturity inflation-index debt traded close to the lowest in more than a year. Volatility reached the highest level since January.

“There is some fear that something else will weaken in terms of economic growth around the world,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “When the Fed attempts to remove liquidity from the system, you start to see the cracks appear.”

The two-year note yield dropped six basis points, or 0.06 percentage point, to 0.37 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 0.5 percent securities maturing in September 2016 added 1/8, or $1.25 per $1,000 face amount, to 100 8/32. The yield fell as much as seven basis points, the largest decline since September 2013.

Market Prices

The 30-year bond fell six basis points to 2.95 percent and touched 2.94 percent, the lowest since May 3, 2013. The benchmark 10-year yield dropped eight basis points to 2.20 percent. It earlier reached 2.19 percent, a level not seen since June 2013.

Jeffrey Gundlach, chief executive officer of money management firm DoubleLine Capital LP in Los Angeles, which oversees $56 billion, said in an interview on CNBC that 10-year yields will reach a bottom at 2.20 percent.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, reached 1.92 percentage points, almost the lowest since June

2013.

The Bank of America Merrill Lynch MOVE index, a gauge of Treasuries volatility, rose to 68.69 on Oct. 10, the highest level since Jan. 9.

Traders see a 45 percent chance the Fed will raise its benchmark rate by its September 2015 meeting, fed funds futures data compiled by Bloomberg show. That’s down from a 74 percent chance as of Oct. 1. The target rate has been maintained in a range of zero to 0.25 percent since 2008 to support the economy.

Fed Policy

“Markets are realizing the Fed is pivoting,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the U.S. central bank. We’re moving “toward an environment of lower global growth and inflation. Rates will stay low for a long period of time.”

While the Fed is set to end its bond-purchase stimulus program this month, the prospect of monetary tightening has been tempered by concern that output is sagging from Europe to China.

Germany will probably grow by 1.2 percent this year and by

1.3 percent in 2015, marking respective drops from 1.8 percent and 2.0 percent forecast in April, the Economy Ministry said today in its biannual review.

The ZEW Center for European Economic Research’s index of investor and analyst expectations slid to the weakest level in almost two years in Europe’s biggest economy.

U.K. consumer-price growth slowed to 1.2 percent in the 12 months through September, the lowest since September 2009 and below the Bank of England’s 2 percent target for a ninth month.

Fed Vice Chairman Stanley Fischer underscored concern the global economy is slowing, fueling speculation the central bank will push back the timing for raising interest rates.

Fischer View

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in an Oct. 11 speech at the International Monetary Fund’s annual meetings in Washington.

Minutes of the Fed’s September gathering released Oct. 8 showed officials highlighted concern that deteriorating growth abroad and a stronger dollar may hurt the domestic economy by curbing exports and damping inflation.

“All eyes are on Europe,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The negative sentiment is hurting, and you can look at how the market’s changed since the minutes.”

Analysts surveyed by Bloomberg last week cut their 10-year yield forecast for the end of 2014 to 2.71 percent, the lowest in data going back to July 2013.

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