Treasury Investors Uncowed by Fed Rate Prospects Amid Oil Rout

  • 10-year yield posts biggest weekly drop since October
  • Note's spread over two-year debt close to lowest since Feb.

You’d never know a Federal Reserve interest-rate increase may be days away judging by demand for Treasuries.

Investors piled into U.S. government debt this week even as the Fed is likely to lift its target from near zero on Dec. 16. Ten-year yields posted their biggest weekly decline since October as tumbling oil prices damped inflation expectations. Tame inflation preserves the value of the securities’ fixed payments.

Losses in U.S. stocks also led investors to seek a haven. The U.S. sold $58 billion of coupon-bearing obligations this week, including a 10-year offering for which a gauge of demand was the highest since September.

The decline in oil "is giving traders a green light on the long end of the curve," said Kevin Giddis, the Memphis, Tennessee-based head of fixed income at Raymond James & Associates. "There’s no real fear of inflation."

The benchmark 10-year yield fell 14 basis points this week, or 0.14 percentage point, to 2.13 percent, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 rose about 1 1/4, or $12.50 per $1,000 face amount, to 101 2/32. Thirty-year yields declined a similar amount as oil sank to the lowest since 2008 amid estimates that OPEC’s decision to scrap production limits will fuel a supply glut. The Standard & Poor’s 500 Index of shares lost 3.8 percent this week, the most since August.

The Treasury sold three, 10- and 30-year debt this week to demand that was in line with averages at auctions this year. At the Dec. 9 offering of 10-year notes, the bid-to-cover ratio, a gauge of demand, was 2.64, the most since the September offering.

Thinner Cushion

As the appetite for longer-dated obligations rose, the extra yield they offer has shrunk. The spread between two- and 10-year yields flattened to 1.25 percentage points, close to the lowest since February. Expectations that the Fed is on the brink of a tightening cycle are keeping shorter-term yields from falling as much as those on longer maturities.

Hedge-fund managers and other large speculators increased futures bets to the highest since 1993 that five-year notes will fall, according to Commodity Futures Trading Commission data for the week ended Dec. 8.

The probability the Fed will increase its benchmark by its meeting on Dec. 15-16 was 72 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent. Swaps indicate the Fed’s target will reach 0.72 percent in a year.

"In the front end, there’s a little bit of uncertainty about how things are going to go," said Thomas Simons, a money-market economist in New York at Jefferies Group LLC, one of 22 primary dealers that trade Treasuries with the Fed. "There’s a higher level of uncertainty on when the next hike is going to be and how many there are going to be next year."

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