Treasuries Join October Global Bond Slump as Fed Rate Hike Looms

  • Inflation outlook, global bond slump weigh on U.S. securities
  • Meeting minutes show officials see rate rise ‘relatively soon’

FOMC Minutes Reveal a Much More Divided Fed

Call it an October surprise for investors in the $13.7 trillion U.S. Treasuries market.

With traders preparing for quickening inflation and a Federal Reserve interest-rate increase, U.S. government bonds have lost 0.9 percent so far this month, according to Bloomberg Barclays U.S. Treasury Index data, as benchmark yields have risen every trading day except one. That’s already on pace for the biggest decline since February 2015, and it comes as government securities have fallen around the world this month.

The minutes of the Federal Open Market Committee’s Sept. 20-21 meeting released Wednesday show that policy makers saw a rate increase as a close call and that the central bank should hike “relatively soon.” While traders throughout 2016 have questioned the Fed’s resolve to boost rates, last month’s dissent by three officials signals growing angst about keeping rates suppressed as the U.S. economy strengthens.

Investors can expect a "somewhat significant" increase in nominal bond yields, Mike Swell, co-head of global portfolio management for fixed income at Goldman Sachs Asset Management in New York, said in an interview on Bloomberg Television Tuesday.

Debt Auctions

The benchmark U.S. 10-year note yield rose about one basis point, or 0.01 percentage point, to 1.77 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data, the highest closing level since June. The price of the 1.5 percent security due in August 2026 was 97 18/32. Treasuries pared losses after the release of the Fed’s minutes.

The market-implied probability that the Fed will increase rates by its December meeting is about 66 percent, according to fed fund futures data. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.

A $20 billion U.S. 10-year debt auction Wednesday drew the highest yield at a sale of the securities since March. That lured investors, with a gauge of demand known as the bid-to-cover ratio rising to the most since June. A $24 billion three-year note sale earlier in the day drew the highest auction yield since January. 

The U.S. will sell $12 billion of 30-year bonds on Thursday.

“Simply backing yields up further ahead of supply for an accommodation is an intuitive enough move, but the question we’re focused on is whether or not a convincing round of dip-buying is waiting,” Ian Lyngen, who will start next week as BMO Capital Markets Corp.’s head of U.S. rates strategy, wrote in a report.

Inflation Outlook

At least one measure signals fewer buyers may be waiting in the wings. A survey of Treasury clients by JPMorgan Chase & Co. found the most active shorts since November 2015, while all long positions touched the lowest level since May.

The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, expanded to as wide as 1.69 percentage points on Tuesday. The spread has increased from as little as 1.12 percentage point in February.

U.S., Japanese and European central bankers have resorted to unprecedented monetary stimulus to try to boost inflation in their economies. Europe and Japan are using negative interest rates, while the Fed has raised its benchmark rate only once since cutting it to a record low near zero in 2008. 

Rising oil prices are feeding forecasts for consumer prices to rise, with crude oil climbing to its highest closing level this week in more than a year. Inflation in the Group of Eight nations will be 1 percent this year and 1.9 percent in 2017, based on Bloomberg surveys of economists. The figure was as high as 3.75 percent in 2008.

Watch Next: Fed Minutes as Hawkish as a Dovish Fed Can Get, Says Dryden

— With assistance by Paul Dobson

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