Treasuries Lead Sovereign Rally Amid Flight From Market Turmoil

Treasuries rose along with sovereign debt of major economic peers as slumping crude-oil prices damped inflation and growing financial turmoil in Russia fueled haven demand.

U.S. 30-year bond yields dropped to the lowest level in two years as the Federal Reserve meets today and tomorrow to review the timeframe for raising borrowing costs even as inflation remains below its 2 percent target. German bunds, U.K. gilts, and Japan’s securities rose as oil prices reached less than $54 a barrel in New York earlier. Russia’s ruble tumbled even as the central bank increased its key rate to 17 percent from 10.5 percent.

“It’s causing a flight to quality into Treasuries,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “Although attention has moved to the Fed, most eyes are trading off what oil is doing. Russia is leading the charge in the fear.”

The 30-year bond yield dropped six basis points, or 0.06 percentage point, to 2.69 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 3 percent security maturing in November 2044 added 1 6/32, or $11.88 per $1,000 face amount, to 106 10/32. The yield dropped as much as eight basis points to 2.67 percent, the least since Sept. 5, 2012.

Price Swings

A measure of volatility rose to the highest level since October. Bank of America Merrill Lynch’s MOVE Index, which gauges price swings in Treasuries based on options, rose to

80.72. The 2014 average is 61.77.

The volume of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, climbed to $424.9 billion, the most since Dec. 5. The daily average this year is $332.2 billion.

The 10-year note yield almost touched 2 percent, the lowest since Oct. 16. It is still the highest-yielding among the Group of Seven countries, as the U.S. notes yielded 83 basis points more than the average of their G-7 peers.

The average yield among securities in the Bank of America Merrill Lynch World Sovereign Bond Index was at 1.6 percent. It dropped to 1.59 percent on Nov. 30, the lowest level since May


Sovereign Yields

Germany’s 10-year yield fell to 0.566 percent, the least since Bloomberg began collecting the data in 1989. The yield on 30-year gilts dropped to 2.439 percent, the lowest since Bloomberg started collecting the data in 1996. Japan’s 10-year yields dropped to 0.365 percent, the least since April 2013.

Futures prices show a 52 percent chance the Fed will raise its interest-rate target by its September meeting, down from 58 percent yesterday, according to data compiled by Bloomberg.

“There’s nervousness about what tomorrow brings, what the Fed announces,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed. “People are questioning that today because of volatility in the markets and the uncertainty with oil, Russia and what’s going on in Europe.”

Investors are favoring longer-term securities versus short-term debt as Fed policy makers consider whether to retain their pledge to keep borrowing costs low for a “considerable time.” The central bank had held its target for the fed funds rate at zero to 0.25 percent since December 2008.

Fed Policy

The Federal Open Market Committee will adopt a word such as “patient” to describe its approach to policy, according to 68 percent of 56 economists surveyed by Bloomberg late last week.

“The perception is the Fed is going to be somewhat dovish tomorrow,” said Thomas di Galoma, head of fixed-income rates at ED&F Man Capital Markets in New York.

The difference between yields on U.S. five-year notes and equivalent Treasury Inflation Protected Securities touched 1.07 percentage points, the lowest level since September 2009.

A report tomorrow is forecast to show the consumer price index rose 1.4 percent in the 12 months ending November, down from 1.7 percent in the period ending October.

Thirty-year bonds are benefiting from the outlook for slow inflation, resulting in the flattening of the yield curve, a chart showing rates on bonds of different maturities.

The extra yield on 30-year Treasuries over five-year notes, the yield curve, was at 117 basis points. It shrank to 116 basis points yesterday, the narrowest since 2009.

The divergence between long- and short-term Treasuries is also shown in this year’s returns. Five-year notes gained 3.2 percent through yesterday, versus 29 percent for 30-year bonds, based on Bank of America Merrill Lynch indexes.

While higher Russian interest rates are meant to support the ruble, they also risk curbing growth in an economy that is already being hurt by sanctions and by tumbling oil prices.

The ruble plunged past 80 per dollar as Russia’s attempt to defuse a crisis with the largest interest-rate increase since 1998 failed to revive confidence in the currency hit by slumping oil prices and international sanctions. It pared losses to trade at 67.5000 per dollar, down 4.7 percent.

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