Treasury Yields Decline to Lowest Since 2012 Before Fed Meeting

Updated on
  • U.S. debt gains for fifth day, longest streak since February
  • Probability of 2016 rate hike at 47% as Brexit vote looms

Treasuries gained, with yields falling to the lowest since 2012, as traders wagered that the Federal Reserve won’t raise interest rates when it meets this week and investors sought safe havens before the U.K. votes on its European Union membership.

Benchmark 10-year notes rose for a fifth day, the longest winning streak since February, as futures traders ruled out any chance of a rate hike when the Fed concludes its two-day policy meeting Wednesday, showing the odds of an increase by December at 47 percent, down from 76 percent at the start of the month. Data due Tuesday will show retail sales growth slowed in May from a month earlier, according to a Bloomberg survey of economists.

U.S. government bonds are in high demand as a respite from negative rates around the world as central banks abroad pursue measures to stimulate their economies. The yield on the Bloomberg Global Developed Sovereign Bond Index dropped to a record 0.583 percent on Friday. The rush into Treasuries accelerated after a U.S. Labor Department report on June 3 showed the slowest jobs growth in almost six years.

“Every time you see yields pick up when there are concerns about inflation and concerns about the Fed raising interest rates, huge buyers come in, particularly international buyers from countries experiencing negative interest rates,” said Richard Turnhill, BlackRock Inc.’s global chief investment strategist, in an interview on Bloomberg Television. “We don’t see that stopping anytime soon.” 

Flatter Curve

Benchmark Treasury 10-year note yields dropped three basis points, or 0.03 percentage point, to 1.61 percent as of 5 p.m. in New York, the lowest since December 2012, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 100 1/8.

The yield on 30-year bonds fell two basis points to 2.43 percent, the lowest since February 2015.

The gap between yields on two- and 10-year securities, a measure of the yield curve, fell to about 89 basis points, the flattest since 2007. With longer-dated bonds surging, there’s a risk that the yield curve may become inverted, according to Peter Borish, chief strategist at Quad Capital, an investment fund and broker/dealer, who dismissed concerns that the bond rally constituted a “bubble.’’

“The issue is not whether or not there is a bubble -- it’s whether or not the Fed actually moves and we move toward a flat to potentially inverted yield curve,” Borish said in an interview on Bloomberg Television. “It’s not the level of interest rates, it’s the level of the yield curve. If it starts to get inverted or get really flat, that’s trouble.”

An inverted curve occurs when yields on long-dated bonds fall below those on shorter-dated debt. It’s often seen as a harbinger of recession. Short-dated notes are more sensitive to Fed policy moves, while longer-dated debt is more influenced by expectations for economic growth and inflation.

Treasuries have returned 4.3 percent this year, according to Bloomberg World Bond Indexes. That lags behind German government securities, which earned 5.2 percent, and U.K. gilts, which gained 7.7 percent.