Treasuries Rally Most Since October as Haven Demand Holds Sway

Updated on
  • Struggling equities push investors toward fixed income
  • Surging U.S. job growth fails to derail January bond rally

Treasuries soared this week, posting their biggest advance since October, as investors piled into assets offering protection amid a tumble in stocks and signs the global economy is faltering.

The rally pushed 10-year yields to the lowest in more than two months, reaching levels from before the Federal Reserve’s Dec. 16 move to lift interest rates from near zero. With Chinese financial markets in turmoil for much of the week and oil prices sinking, not even a stronger-than-forecast U.S. labor report Friday deterred bond buyers.

“There’s not as much confidence in the scenario that says everything’s going to be fine,” said Jeffrey Rosenberg, chief investment strategist for fixed income in New York at BlackRock Inc., which manages $4.5 trillion. “Rates are not going to end up significantly higher if China, commodity and credit fears end up becoming a much bigger issue.”

Longer-maturity Treasuries gained Friday after initially falling on a report showing American employers added 292,000 jobs in December, exceeding the highest estimate in a Bloomberg survey. Bond traders focused on weaker-than-expected average hourly earnings in the labor data, evidence that employment strength isn’t generating quicker inflation.

Yields on the benchmark 10-year Treasury fell three basis points, or 0.03 percentage point, to 2.12 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent security maturing in November 2025 rose 1/4, or $2.50 per $1,000 face amount, to 101 5/32. For the week, the yield fell 0.15 percentage point, the most since early October.

The gains drove 10-year yields down to 1.18 percentage points above two-year yields, the smallest difference since July 2012.

Cross-Asset Trades

Treasuries were buffeted this week by volatility in other assets. U.S. debt has gained 0.9 percent in 2016 as investors sought refuge from a rout in U.S. stocks. The market tumult originated in China, the biggest foreign holder of Treasuries, whose currency cheapened this week by the most since August.

Investors are shifting away from seven years of stimulus “to a paradigm where they have to contend with sluggish global growth and higher volatility,” said Guy Haselmann, head of capital-markets strategy at Bank of Nova Scotia in New York, one of the 22 primary dealers that trade with the Fed. “What higher volatility means is you have to take down your amount of risk.”

Skeptical Traders

The global market tumult is fueling skepticism about Fed policy makers’ forecast of four more rate increases this year, after their quarter-point move last month.

Derivatives traders expect about two increases in 2016 as investors question whether the Fed will be able to tighten policy amid low inflation, economic weakness abroad and resurgent financial-market volatility emanating from China. Traders see the fed funds effective rate at about 0.8 percent at the end of 2016, compared with the median policy rate outlook of central bank officials of 1.375 percent.

Treasuries maturing in 10 or more years should benefit no matter how many times the Fed raises rates, Haselmann said. With four rate boosts, stocks may sell off and drive investors into U.S. debt. If officials opt to wait, a rush for safe assets will keep yields low, he said.

“We’ve shifted into an environment where you’re supposed to be selling risk assets and moving those proceeds into the long end” of the Treasury market, he said.