Treasuries Triumph as Tepid Inflation Outlook Seen Slowing Fedby
Traders reduce wagers on pace, timing of U.S. rate increases
`Markets are telling us that the global economy is quite sick'
Treasury 10-year note yields fell to the lowest since October as plunging oil prices and a global stock-market rout fueled concern that economic growth is slowing and cast doubt on the Federal Reserve’s ability to raise interest rates.
Treasuries advanced for a fourth day as U.S. equities closed at the lowest level since August and European shares fell into a bear market. Crude-oil prices ended below $30 per barrel. A report showed U.S. retail sales declined in December, wrapping the weakest year since 2009.
U.S. government debt is surging this year as plunging commodity prices undermine inflation expectations and as financial-market turbulence emanating from China threatens global growth. A bond-market gauge of the inflation outlook over the next decade, known as the 10-year break-even rate, fell to the lowest since September, as traders reduced wagers on how soon and how often the Fed will raise interest rates this year.
"It’s more than just a safe-haven trade," said Kevin Giddis, the Memphis, Tennessee-based head of fixed-income at Raymond James & Associates. "We’re seeing the economic foundation break down a little bit. If we get another bout of weaker economic numbers, 1.75 or 1.5 percent is not out of the realm of possibilities" for 10-year Treasury yields.
The benchmark Treasury 10-year note yield declined five basis points, or 0.05 percentage point, to 2.03 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 1.98 percent, the lowest since Oct. 15. The 2.25 percent security due in November 2025 rose 15/32, or $4.69 per $1,000 face amount, to 101 29/32.
The yield on the two-year note, which is most sensitive to Fed policy expectations, fell four basis points to 0.85 percent, the lowest since Nov. 13.
Treasuries maturing in more than a year have earned a total return of about 1.6 percent in January, after returning 0.9 percent in 2015, Bloomberg bond indexes show. In comparison, the Standard & Poor’s 500 index of shares has lost about 8 percent in 2016, including reinvested dividends.
"What’s happening to commodities is just validating where bond yields are going," said Steven Major, head of fixed-income research at HSBC Holdings Plc, in an interview on Bloomberg Television. "These oil markets and equity markets are telling us that the global economy is quite sick."
The 0.1 percent drop in retail sales followed a 0.4 percent gain in November, Commerce Department figures showed Friday in Washington. The control group, a proxy for sales going into gross domestic product consumption calculations, fell 0.3 percent in December and was revised lower in November.
The cost to protect against defaults by North American companies soared. The Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped to the highest since November 2012, while a similar measure for investment-grade debt rose to a three-year high.
Futures traders assign about a 28 percent chance that the Fed will boost borrowing costs in March, based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase. That implied probability rose as high as 53 percent on Dec. 30, following the Fed’s Dec. 16 decision to raise rates for the first time in nearly a decade.
The U.S. economy should continue to grow faster than its potential this year, supporting further interest-rate increases, New York Fed President William C. Dudley said in remarks prepared for a speech Friday in Somerset, New Jersey. “In terms of the economic outlook, the situation does not appear to have changed much” since the Fed’s December meeting, Dudley said.
The Fed expects to boost borrowing costs four times this year, which would bring the effective rate to 1.375 percent, according to the median forecast among Federal Open Market Committee members.
Derivatives traders expect the effective fed funds rate will rise to about 0.7 percent in a year’s time, implying one increase this year, according to data compiled by Bloomberg. As of Dec. 30, they were betting borrowing costs would rise to 0.93 percent, which would require the Fed to lift rates twice, assuming it raised its target range by 0.25 percentage point each time.