Treasuries Stage Longest Rally in 12 Months on China Turmoil

  • Probability of Fed interest-rate increase by April declines
  • Fed's Lacker cites confidence inflation will reach target

Inside the FOMC's Dec. Meeting Minutes

Ten-year Treasuries advanced for a sixth day, the longest winning streak in 12 months, as turmoil in Chinese markets drove demand for the safest assets and prompted traders to cut bets on a U.S. interest-rate increase by April.

There’s a 43 percent chance the Federal Reserve will follow its Dec. 16 rate boost, the first since 2006, with another move by its meeting in three months, futures prices suggest. That’s down from 56 percent on Dec. 31.

From two-year notes to 30-year bonds, yields are below levels from the December Fed gathering. Chinese stock exchanges closed early for the second time this week while a drive by the nation’s central bank to guide its currency lower stoked concern about the impact on global growth and supported U.S. debt. Oil slid to a 12-year low, damping inflation expectations.

“Rising risk aversion is clearly supporting government bonds as safe-haven flows increase on the mounting worries about the Chinese economy, the further fall in oil prices and the uncertain global picture,” said Nick Stamenkovic, a fixed-income strategist at Edinburgh-based broker RIA Capital Markets Ltd. “If the global turmoil persists, then the pressure on the Fed to take a break for longer would increase.”

Last Streak

The 10-year note yield declined one basis point, or 0.01 percentage point, to 2.16 percent as of 9:15 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 rose about 1/8, or $1.25 per $1,000 face amount, to 100 25/32. 

The last time the benchmark note climbed for six days was January 2015. The yield has fallen from 2.3 percent when the Fed shifted rates Dec. 16.

Treasuries returned 0.5 percent this month through Wednesday, versus 0.9 percent for all of 2015, based on Bloomberg World Bond Indexes. The China unrest combined with stagnant inflation is driving speculation the Fed will fall short of its intention to raise rates four times in 2016.

Pacific Investment Management Co. says it expects two or three increases. Higher rates tend to depress bond prices.

Third Base

“The Fed says they’d like to do four hikes, but you know, I’d like to play third base for the Yankees, and it’s not going to happen,” Richard Clarida, Pimco’s New York-based global strategic adviser, said in an interview Wednesday. “If we do get four hikes, then I’ll be thrilled because it’ll mean the economy is booming. Our view is the economy’s plodding along.”

This week’s market moves echo the rout in Chinese shares in August that drove stocks down around the world and spurred the Fed at its September meeting to cite “global economic and financial developments” in deciding against raising rates at the time.

In minutes of the December meeting issued Wednesday, almost all participants agreed inflation would accelerate toward the Fed’s 2 percent goal, from the current level of about zero, though many expressed concern it would take longer than previously expected. 

Government data Friday will probably show U.S. job growth slowed in December, according to a Bloomberg survey of economists.

Federal Bank of Richmond President Jeffrey Lacker, speaking Thursday, expressed confidence that inflation will return to the central bank’s target after oil prices and the dollar stabilize and called for a continued tightening in monetary policy.

“While there is uncertainty about the pace at which monetary policy rates will rise, the case for an upward adjustment in rates should be clear,” Lacker said in the text of a speech in Raleigh, North Carolina.

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