Treasury Investors See Quarterly Gains as Risk-Off Wagers Reign

  • U.S. bond-market volatility reached two-week high Tuesday
  • BMO's Sheridan says Fed won't raise interest rates this year

Ten-year Treasuries posted the biggest quarterly advance of 2015 amid declines in stocks and concern that China’s slowing economy will restrict global growth.

The yield on the benchmark 10-year note reached a five-week low after an index measuring Chicago-area manufacturing indicated contraction for the fifth month this year. Treasuries have benefited as cooling growth in China helped wipe $11 trillion off the value of global equities. Treasuries have earned 1.9 percent this year, buoyed by a 2 percent gain this quarter, according to Bank of America Merrill Lynch data through Sept. 29.

"Concerns about a global growth slowdown and a lack of inflation -- all of that has clearly benefited Treasuries," said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co in New York. "It’s been the safety-buying driving Treasuries."

The benchmark U.S. 10-year yield fell one basis point, or 0.01 percentage point, to 2.04 percent as of 4:59 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 rose 1/8, or $1.25 per $1,000 face amount, to 99 21/32. The yield is down about 32 basis points since June 30, the biggest quarterly decline since the last three months of 2014.

Stocks and many emerging-market currencies rallied Wednesday, at the end of the most volatile quarter for financial markets since 2011.

The conditions that created the appetite for government debt -- and contributed to the Federal Reserve’s decision to forgo raising interest rates this month -- aren’t going away, said Barra Sheridan, a rates trader at Bank of Montreal in London.

“Even though bond yields aren’t at a particularly attractive level, I’m not bearish on Treasuries,” Sheridan said. “You’re going to see a bit of month-end allocation into equities,” he said. “I’d be a buyer of bonds.”

Volatility Jumps

The Bank of America Merrill Lynch MOVE Index, a measure of Treasuries volatility based on options trading, touched a two-week high of 83 basis points Tuesday. It climbed to 95 on Aug. 24, at the height of the China-led equities rout.

Yields rose in morning trading after ADP Research Institute figures showed companies in the U.S. added 200,000 jobs this month. A Labor Department report Oct. 2 is forecast to show improving employment conditions, which the Fed watches when considering whether to tighten policy. The economy probably added 200,000 jobs this month, compared with 173,000 in August, according to the median forecast in a Bloomberg survey of analysts.

Traders see a 41 percent probability that the Fed raises rates by the December meeting, down from 60 percent a month ago, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.

“The Fed won’t raise this year,” BMO’s Sheridan said. The global economy is still deteriorating, he said.

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