Treasury Yields at Lowest Since 2013 Show Bets on Fed Hike Fade

  • Probability of boost doesn’t exceed 50% until December
  • Global bonds in best annual start since at least 1997

Treasuries logged their biggest two-week gain since February as traders wagered that the Federal Reserve will forgo raising interest rates for months to come.

Benchmark yields sank to the lowest since 2013, driven by investors seeking shelter in government debt amid global growth concerns and the threat of instability when the U.K. votes June 23 on membership in the European Union. The “Leave” campaign took a 10 percentage-point lead in a poll published Friday.

With more than $8 trillion of sovereign debt carrying negative rates, the appeal of U.S. obligations is growing. Ten-year U.S. notes yield more than securities of all but seven developed countries, data compiled by Bloomberg show.

“The more you have negative rates in the rest of the world, the more attractive Treasuries look,” said Jabaz Mathai, a U.S. rates strategist in New York at Citigroup Inc., one of the 23 primary dealers that trade with the Fed.

The benchmark 10-year note yield fell six basis points this week, or 0.06 percentage point, to 1.64 percent, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 was at 99 27/32. The yield has dropped 21 basis points since May 27.

Zero Chance

Yields on two-year notes, the coupon maturity most sensitive to changes in Fed policy, fell to the lowest in a month, closing the week at 0.73 percent.

The futures-implied chance of a Fed rate increase next week fell to zero from 22 percent on June 2, the day before the government released weaker-than-forecast May payrolls data. The probability doesn’t exceed 50 percent until December.

With central banks in Japan and Europe adding stimulus to support their economies, bonds worldwide are off to their best start to a year since at least 1997, according to a Bank of America Corp. gauge of global investment-grade debt. The index has earned 4.6 percent through June 9.

German 10-year yields touched an all-time low 0.01 percent this week, while gains in comparable-maturity Japanese and Swiss securities drove their already-negative yields to new lows.

2008 Echo

In the U.S., the yield curve flattened and break-even inflation rates declined as traders bet on tepid economic growth. The gap between two- and 30-year yields shrank to 172 basis points, approaching the narrowest since 2008.

Hedge funds and other speculators boosted net bullish bets on Treasury bond futures to a historic high in the week ended June 7, according to Commodity Futures Trading Commission data released Friday. Net longs totaled 90,748 contracts, up from 64,302 a week earlier.

Investors have confidence to buy longer-maturity debt because they’re not worried inflation will heat up. U.S. households’ long-term inflation expectations, a measure tracked by policy makers, fell to a record this month in data going back to 1979, according to preliminary results of the University of Michigan’s survey of consumers released Friday.

“There is no inflation, no hope of inflation, and that’s why central banks are doing what they’re doing,” said Tom di Galoma, managing director of government trading and strategy at investment bank Seaport Global Holdings LLC in New York. Meanwhile, “we’re facing the possibility of the EU breaking up, so how could they possibly be thinking about tightening?”

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