Treasuries Rise as Dollar Falls Amid Economic Data; Oil Slumps

  • Energy shares lead U.S. losses; Netflix jumps after market
  • Nikkei futures signal drop as Hong Kong, Korea contracts rise

What's Behind This Month's Bond Selloff?

Treasuries rebounded from a four-month low, while the dollar retreated after mixed data on the world’s largest economy supported the case for monetary policy to remain accommodative. Oil declined.

U.S. government bond yields dropped as the greenback retreated against most of its major peers after a measure of manufacturing in New York unexpectedly contracted, while national factory production grew for the third time in four months. Energy shares drove U.S. losses as investors assessed corporate earnings. Crude fell a second day as OPEC members added supply and American producers increased drilling, threatening to compound a global surplus.

Traders are monitoring economic data and rhetoric from policy makers for clues as to the path of U.S. interest rates. The Federal Reserve Bank of New York said its Empire State index declined this month as analysts projected expansion, while data on U.S. manufacturers signaled recovery. Investors also weighed comments from Fed Vice Chairman Stanley Fischer Monday, who said that he sees limits to how far the central bank can pursue a strategy aimed at continuing to reduce unemployment.

“People are trying to figure out what the Fed is going to do,” Thomas Garcia, head of equity trading at Thornburg Investment Management Inc. in Santa Fe, New Mexico, said by phone.

Futures indicate a 66 percent probability the Fed will raise rates by its December meeting, up from around 50 percent as recently as Sept. 27, according to calculations by Bloomberg.

Bonds

Benchmark 10-year Treasury yields fell three basis points, or 0.03 percentage point, to 1.77 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The yield earlier touched 1.81 percent, its highest level since June.

The rally comes following a tumble this month in longer-dated Treasuries. Steven Major, global head of fixed-income research at HSBC Holdings Plc, said the Fed’s policy-tightening pace is too slow for rates to climb meaningfully before the next economic downturn.

“To me the structural story has not changed -- we are talking about the debt overhang, demographics, productivity, excess savings -- all the factors for the bond market,” Major said Monday in an interview with Bloomberg TV. “A year out, yields will be lower than they are now. Five years out, I doubt they’d be higher than this level.”

The selloff in U.K. government bonds gathered pace as prospects of faster inflation gave investors another reason to pull back from a market hurt by the mounting economic and political cost of Brexit.

Currencies

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell 0.3 percent after reaching its highest level in almost seven months on Oct. 13. The euro rose 0.3 percent to $1.10000 following its biggest weekly drop since November. The yen also advanced 0.3 percent, to 103.89 per dollar, after weakening 0.5 percent on Friday.

“We’re looking at this as a short-term pullback after some of the big moves we’ve seen,” said Matt Weller, a senior market analyst at Faraday Research in Grand Rapids, Michigan.

The pound remained near a three-decade low against the dollar, closing at $1.2181. Bank of England Deputy Governor Ben Broadbent said the currency’s slump since the U.K.’s vote to quit the European Union will help the economy overcome shocks from the decision.

Elsewhere in the world, the rand led gains among major currencies after a group of senior South African business leaders publicly expressed support for Finance Minister Pravin Gordhan as he faces fraud charges.

New Zealand’s dollar jumped early on Tuesday after data showed an unexpected increase in consumer prices.

Stocks

U.S. stocks slipped Monday, with energy producers falling 0.4 percent as a group as crude oil sank, while Amazon.com Inc. led retailers lower. Lenders retreated even as Bank of America Corp.’s quarterly results exceeded estimates.

Netflix Inc. surged 20 percent after regular trading hours, as the online television service said it adding more subscribers than estimated in the third quarter. International Business Machines Corp. sank 2.7 percent in late trading after reaffirming its full-year view and despite reporting operating earnings that topped analysts’ forecasts.

European stocks fell for the fourth time in five days on concern over the health of the global economy, even as speculation grew that inflation will quicken. All industry groups in the Stoxx Europe 600 Index slid, pushing the benchmark gauge down 0.7 percent. The MSCI Emerging Markets Index dropped 0.3 percent, paring its gains this year to 13 percent.

In Asia, Japanese index futures foreshadowed a retreat, while contracts on stock gauges in Australia and Hong Kong advanced.

Commodities

West Texas Intermediate crude dropped 0.8 percent to $49.94 a barrel in New York, its lowest level since Oct. 7. Brent for December delivery fell 0.8 percent to $51.52 a barrel on the London-based ICE Futures Europe exchange, closing at a $1.15 premium to December WTI.

Libya’s oil output expanded to 560,000 barrels a day, according to the National Oil Corp., up from 540,000 last week. Iran repeated plans to boost production to 4 million barrels a day. Nigeria aims to raise output by 400,000 barrels a day to 2.2 million, Oil Minister Emmanuel Ibe Kachikwu said in New Delhi. Rigs targeting crude in the U.S. rose for a seventh week to the highest since February, Baker Hughes Inc. said.

“There’s a growing recognition that OPEC will have a hard time getting their act together,” said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida.

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