Treasuries Extend Global-Debt Rally on China, U.S. Growth Worry

  • Stocks slide as manufacturing gauges fall short of estimates
  • Iran-Saudi Arabia tensions fuel demand for safest securities

Treasuries advanced the most in two weeks, extending a global rally in government debt, as stocks tumbled on reports showing manufacturing contracted in the two largest economies.

With a worldwide equities selloff driving demand for the relative safety of sovereign debt, Treasury 10-year yields fell by the most since Dec. 17. Bonds from Europe and Asia also climbed. Increased tensions between Iran and Saudi Arabia added to the haven bid. A report showed U.S. manufacturing activity in December contracted at the fastest pace in more than six years, after slowing factory output in China triggered the rout in stocks.

The Treasury rally goes against the consensus that yields will rise in 2016 with Federal Reserve officials indicating they aim to raise interest rates as many as four times this year. Though the central bank boosted borrowing costs a quarter percentage point last month, renewed signs of financial turmoil and slowing growth may damp expectations regarding when and how quickly policy makers will move again.

“The market definitely didn’t expect to start the year off on this kind of note,” said Gennadiy Goldberg, a U.S. interest-rates strategist for TD Securities LLC in New York. “The market is in fact evaluating to a large extent how much the Fed can hike this year.”

The yield on the benchmark U.S. 10-year note declined three basis points, or 0.03 percentage point, to 2.24 percent at 5 p.m. in New York, based on Bloomberg Bond Trader data. The 2.25 percent note due in November 2025 climbed 7/32, or $2.19 per $1,000 face amount, to 100 2/32.

Slow Growth

Yields also fell in Germany, France and the U.K.

Traders are pricing in a 56 percent chance that the Fed raises rates at or before its April meeting, based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.

Signs of slow growth and restrained inflation have led investors to favor longer-term debt. The extra yield on 10-year notes over two-year maturities shrank to 1.20 percentage points, the least since February.

Stock trading was halted in China on Monday after the nation’s CSI 300 Index slumped 7 percent. China’s shares plunged after an industry report showed manufacturing in the world’s second-biggest economy contracted in December more than analysts predicted.

The market moves echoed a rout in Chinese shares about six months ago that drove stocks down globally and spurred the Fed, at its meeting in September, to cite “global economic and financial developments” in deciding against raising rates from near zero. It waited until December for liftoff.

"These were the things that drove the Fed to put on hold the first liftoff, so we’re very sensitive to that type of news in the Treasury market," said David Keeble, head of U.S. dollar rates strategy at Credit Agricole SA in New York. "If it continues, then certainly it will depress confidence -- business confidence, consumer confidence, etc.”

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