Treasuries Head for Best Monthly Gain in a Year as Fed Meets

  • Return of 1.6% driven by safety demand as stocks decline
  • Fed to remain `neutral to hawkish': Mirae Asset Management

Treasuries headed for the best monthly returns in a year on speculation global financial-market turmoil will lead the Federal Reserve to indicate this week that it’s willing to wait before raising interest rates again.

U.S. government bonds handed investors 1.6 percent this month as of Monday, the most since January 2015, based on Bloomberg World Bond Indexes. Tumbling stock and oil prices are sending buyers to government debt as the Fed prepares to start a two-day policy meeting. Treasuries erased gains on Tuesday as oil rebounded.

The gain in Treasuries “has been led by general weakness in risky assets and a view that the Fed hike may have been a mistake,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “The Federal Open Market Committee won’t be hiking rates any more than once or twice this year, as opposed to the three to four that was originally assumed. The market will be looking for some concern at the global market backdrop” from U.S. officials this week, he said.

The benchmark 10-year note yield was little changed at 2.01 percent as of 6:59 a.m. in New York, based on Bloomberg Bond Trader data. The 2.25 percent security due in November 2025 was at 102 1/8.

The yield dropped to as low as 1.96 percent on Tuesday, approaching the level of 1.94 percent reached on Jan. 20 that was the lowest since Oct. 2.

2003 Low

Bonds have rallied since the start of the year as the Standard & Poor’s 500 Index tumbled 8 percent and crude oil reached its lowest level since 2003 last week.

The Fed raised its benchmark rate in December for the first time in almost a decade. Chair Janet Yellen used the word “gradually” or “gradual” about a dozen times in her press conference after that meeting to describe the pace of future increases.

“They will show a more dovish stance” in the Fed statement Wednesday, said Yusuke Ito, a senior investor in Tokyo at Mizuho Asset Management, which oversees about $42 billion. “They have to be more cautious because of the turmoil in the financial markets. There should be continued downward pressure on yields.”

Mizuho holds more long-term Treasuries than the percentage in the index it uses to gauge performance, according to Ito.

Few Changes

Mirae Asset Global Investments says the U.S. central bank probably won’t make too many changes to its policy statement. Will Tseng, an investor for the company in Taipei, said he’s being guided by Fed Vice Chairman Stanley Fischer, who told CNBC this month that policy makers’ median forecast for four rate increases in 2016 was “in the ballpark.”

Fischer also said that China’s cooling economy and other sources of global turmoil make it difficult to predict the path of policy.

“They remain neutral to hawkish,” said Tseng, one of the money managers overseeing $73 billion at Mirae. He said he bought Treasuries in December when the 10-year yield was about 2.30 percent and plans to sell if it falls below 1.90 percent.

None of the 102 analysts surveyed by Bloomberg expects the U.S. central bank to raise interest rates from a range of 0.25 percent to 0.5 percent this week. Only one predicts a change to the benchmark rate, and that’s for a cut back to the level before the December meeting.

The market-implied probability the Fed will raise its main rate at or before its June gathering has dropped to 44 percent, down from about 75 percent at the end of last year, according to futures data compiled by Bloomberg.

The U.S. Treasury is scheduled to sell $26 billion of two-year notes later Tuesday. The securities yielded 0.87 percent in pre-auction trading, down from 1.056 percent at a previous auction on Dec. 28. That was the highest since 2009.

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