Treasuries' Two-Month Gain Is Biggest Since 2012 as Growth Slows

  • U.S. debt has returned 2.3% this year amid global volatility
  • Treasuries may gain even after interest-rate increase: Nikko

Treasuries rose, with benchmark yields posting their biggest two-month decline in almost four years, as below-forecast U.S. economic data boosted haven assets amid concern that global growth is slowing.

Ten-year note yields declined after economic reports showed contracts to purchase previously owned homes dropped in January by the most in two years, while a barometer of Midwest business activity unexpectedly contracted this month. Factors such as a month-end purchasing of long-dated bonds by funds to match duration benchmarks also supported Treasuries.

“It’s not a great start to the data week,” 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 Federal Reserve. “With month-end, you had some pressure on the long end already, and the data is dragging the rest of the curve along with it.”

The data were a downbeat start to a busy week for traders trying to gauge the outlook for monetary policy before Fed officials meet March 15-16. Treasuries have returned 2.4 percent this year, based on Bloomberg World Bond Indexes, as turmoil in world markets pushed investors into the safety of government bonds.

The benchmark Treasury 10-year note yield fell three basis points, or 0.03 percentage point, to 1.73 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 rose 1/4, or $2.50 per $1,000 face amount, to 99.

The 10-year yield has fallen 53 basis points since the end of December, the biggest two-month drop since the period ending May 2012, when it fell 65 basis points.

Economic Data

Gold has gained 17 percent this year while the Bloomberg Dollar Spot Index has fallen 0.6 percent as Treasuries advanced.

“What you have seen in all of these three markets is, effectively, the markets not believing that the Fed will be able to achieve this goal of getting off of this” level of interest rates, said Jeffrey Sherman, portfolio manager with DoubleLine Capital, in an interview on Bloomberg Television.

At the end of last year, Fed officials predicted they would raise interest rates four times in 2016, but futures traders see only about a 54 percent chance of a single increase by the December policy meeting. They see just a 10 percent chance of an increase in March, down from 39 percent at the end of last year, according to overnight indexed swaps data compiled by Bloomberg.

Yields fell Monday after the National Association of Retailers said pending sales of U.S. existing homes made the biggest decline in two years in January, while a rise was expected by economists surveyed by Bloomberg. The Institute for Supply Management reported the Chicago purchasing managers’ index fell to 47.6 -- readings below 50 indicate contraction -- while economists expected 52.4.

Other key data this week include the Institute for Supply Management’s report on business activity on March 3 and the U.S. government’s employment report March 4.

Hedge Funds

Hedge funds are the most bullish on benchmark Treasuries since April 2013, according to the Commodity Futures Trading Commission. Speculators boosted their positions in Treasury 10-year futures to a net 84,659 contracts as of Feb. 23.

The gain in Treasuries signals many investors aren’t expecting a boost to borrowing costs anytime soon.

“The whole set of risks, particularly the global stock rout on the back of China and falling oil prices, has caused constant downward pressure on Treasury yields this year,” said David Schnautz, a London-based rates strategist at Commerzbank AG. “Firmer Treasuries when the Fed is still talking about a rate-hike cycle is often called a pain trade. It’s by nature a trade that hedge funds could be involved in.”

Treasuries may benefit even if the Fed raises rates, said Roger Bridges at Nikko Asset Management Co.’s Australian unit, which oversees $14.3 billion.

“Risk assets might suffer as a result,” prompting “a flight to quality,” he said.

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