Treasuries Advance as Chinese Policy Seen Keeping Fed Rate Low

Updated on
  • Dollar's strength predicted to contain interest rates, prices
  • Futures traders signal no Fed increase until March 2016

Ten-year Treasuries rose as easing monetary policy in China and Europe highlighted the persistent impediments to faster growth and inflation faced by the world’s largest economies, which have contributed to the Federal Reserve’s decision to keep its benchmark interest-rate target near zero.

U.S. debt halted two days of declines after yields had climbed close to their highest level in two weeks and attracted investors. Many traders expect the Fed after its policy meeting ends Oct. 28 to indicate when it may raise rates, even as domestic and international obstacles to liftoff remain. China announced on Oct. 23 it would cut rates to battle a deflationary threat, while the European Central Bank signaled on the day before it was effectively in a countdown to more stimulus.

“We’re facing a global economy with a slower growth profile, we’re seeing concerns about earnings, all of which suggests that the Fed will continue delaying the liftoff,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That’s generally considered supportive for the Treasury market.”

Futures traders predict the Fed will wait until at least March to start raising borrowing costs. The dollar was the best performer among developed-market currencies in the past week after its Australian counterpart.

Benchmark 10-year note yields fell three basis points, or 0.03 percentage point, to 2.06 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The yield reached 2.10 percent on Oct. 23, a two-week high. The 2 percent security due in August 2025 traded at 99 1/2. The 2.23 percentage point gap between U.S. government securities maturing in two- and 30-years was the narrowest since Oct. 1.

The yield on Treasury bills maturing Nov. 12 traded at 0.046 percent, down from as high as 0.13 percent earlier in the day, as negotiators said they had made progress on increasing the statutory borrowing authority for the U.S., which is expected to run out on Nov. 3.

China Decision

Last week China announced it would cut benchmark rates, a move that will also ease the financing burden on indebted local governments and companies. It lowered the amount of deposits banks must hold as reserves, adding liquidity that has been drained by intensifying capital outflows since August’s yuan devaluation. This is the sixth time in a year that the country cut borrowing costs.

“The theme of global monetary-policy easing is a powerful one, and China’s rate cut adds to this theme,” said Peter Chatwell, the head of rates strategy at Mizuho International Plc in London. “This will mean that the dollar will richen on a global basis. It’s a passive tightening for the U.S. and it should mean a rate hike from the Fed is less likely this year.”

Fed Chair Janet Yellen will have to weigh the effect of the slowing global economy as she decides when to increase the benchmark from near zero, according to her predecessor, Ben S. Bernanke. “The tough decision that she and her colleagues have to make is, is there enough domestic momentum to keep us moving forward despite these drags from abroad,” Bernanke said in an interview that aired Sunday on CNN.

The probability the Fed will increase rates by its December policy meeting is about 36 percent, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average0.375 percent after liftoff. For the March meeting, the likelihood is 60 percent.

— With assistance by Wes Goodman

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