Treasuries Surge as Bets Evaporate That Fed Will Hike This Year

  • Bond market's inflation expectations at almost seven-year low
  • Ten-year note yield declines to lowest since Feb. 2015

Treasuries surged, pushing yields to the lowest in a year, as investors sought a haven from global financial-market tumult and traders wagered that the Federal Reserve will wait until late 2017 to raise interest rates again.

Government debt rallied as slumping global stocks and oil drove a gauge of the bond market’s inflation outlook to levels not seen in seven years. Treasuries are benefiting from speculation a weaker global and domestic economy will delay a Fed rate boost. Chair Janet Yellen is scheduled to testify to Congress this week and traders will parse her comments for signs policy makers may back off from December projections of four rate hikes this year.

“The market’s still quite jittery, which tells you there’s very little faith in where things are going with the macro fundamentals,” said Gennadiy Goldberg, an interest-rate strategist in New York at TD Securities (USA) LLC, one of the 22 primary dealers that trade with the Fed. “All the risk aversion is definitely good for Treasuries.”

Futures don’t fully price in another quarter-point Fed increase until November 2017, the slowest pace yet that traders have indicated for a second hike, data compiled by Bloomberg show. On Friday, a boost was reflected for July of next year. Policy makers lifted the rate from near zero in December.

Yields on 10-year Treasury notes fell nine basis points, or 0.09 percentage point, to 1.75 percent as of 5 p.m. in New York. The 2.25 percent security due in November 2025 was at 104 15/32. The Treasury is set to auction $23 billion of the maturity Feb. 10.

Ten-year yields sank to the lowest since February 2015, while two-year yields touched the lowest since October. The difference between the two shrank to less than 1.1 percentage points, the smallest gap since January 2008. Treasuries have earned about 3.4 percent in 2016, according to Bloomberg U.S. Treasury indexes.

The gap between yields on nominal 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer-price growth known as the break-even rate, fell to 1.24 percent, the lowest since April 2009 based on closing prices. A New York Fed gauge of consumer inflation expectations dropped in January to the lowest since at least mid-2013, the bank reported Monday.

“There is a de-anchoring of inflation expectations occurring, and this affects how risk-takers are operating in any market that is sensitive to inflation expectations,” said Peter Chatwell, head of rates strategy in London at Mizuho International Plc.

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