Treasury Bonds Rally Most Since September on Manufacturing Data

  • Spread over two-year yields falls to lowest since April
  • Fed's Evans says December Fed decision fuels `nervousness'

Treasuries surged, driving 30-year bond yields down the most since September, as a report showing U.S. manufacturing unexpectedly shrank last month bolstered expectations that the Federal Reserve will take its time raising interest rates after liftoff from near zero.

Policy makers have signaled that a decision to boost the overnight target for the first time in almost a decade will be data-dependent, leaving traders hanging on each economic release for signs of when the central bank will be able to increase borrowing costs. Prices on 30-year debt reached the day’s high after Chicago Fed President Charles Evans stressed that he’d like to see more evidence of strengthening economic growth and inflation.

The contraction in manufacturing surprised a market that’s prepared for a Fed rate boost as soon as this month’s policy meeting. Treasuries fell the past two months, and in the week ended Nov. 24, hedge funds and other large speculators had amassed the most futures bets since December that two-year notes will fall.

"Every data point is hypersensitive because the clock is ticking until the Fed meeting," said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 22 primary dealers that trade with the Fed.

September Echo

The benchmark U.S. 30-year note yield fell seven basis points, or 0.07 percentage point, to 2.9 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price on the 3 percent note due in November 2045 rose about 1 3/8, or $13.75 per $1,000 face amount, to 101 15/16. The yield fell the most since Sept. 28, a day of losses across global equity markets amid anxiety over the slowdown in China.

Fed Chair Janet Yellen and other policy makers have affirmed that the Dec. 15-16 meeting is live for potential liftoff. She’s scheduled to deliver a speech on the economic outlook in Washington Wednesday.

Evans, a 2015 voter on the policy-setting Federal Open Market Committee, said it’s important the central bank “strongly and effectively communicates its plan for a gradual path for future rate increases” following liftoff during a speech in East Lansing, Michigan on Tuesday. "I admit to some nervousness about our upcoming decision," he said.

The implied probability of an interest-rate increase by year-end fell to 70 percent, from 74 percent before the manufacturing report, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

The Institute for Supply Management’s index dropped to 48.6 last month, the lowest level since June 2009, from 50.1 in October, a report from the Tempe, Arizona-based group showed Tuesday.

Focus Shift

Coming into this week, traders were mostly focused on the government’s Dec. 4 release of monthly jobs data. U.S. employers probably added at least 200,000 jobs for the second straight month in November, according to the median forecast in a Bloomberg survey.

With longer-dated Treasuries outperforming, the yield curve flattened, suggesting investors expect interest rates to rise slowly. The yield difference between two- and 30-year securities shrank to 199 basis points, its smallest since April 2 on a closing basis.

"The Fed is still likely to lift off in two weeks time, but, with this perception of slowing growth, the market is pricing in an even slower projection of raising rates and inflation," said Tom Simons, a government-debt economist in New York at Jefferies Group LLC, a primary dealer.

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