Treasuries Gain on Tepid Data as HSBC’s Major Sees Lower Yields

  • Fed’s empire manufacturing gauge unexpectedly falls in October
  • Measure of inflation expectations rises to highest since April

Treasuries gained, with benchmark yields retreating from a four-month high, after data showing a downturn in regional manufacturing conditions undercut the Federal Reserve’s case to raise interest rates this year.

U.S. 10-year note yields fell after the New York Fed’s Empire State manufacturing survey unexpectedly declined in October. 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.

"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 Television. "A year out, yields will be lower than they are now. Five years out, I doubt they’d be higher than this level.”

The rally comes after longer-dated Treasuries have tumbled this month. Losses extended after Fed Chair Janet Yellen hinted at letting U.S. growth run hot in an on Oct. 14 speech to a Boston Fed conference, indicating the willingness to continue stoking price growth. Her remarks pushed a bond-market gauge of inflation expectations to the highest in more than five months.

Fischer Speech

The benchmark 10-year note yield 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 touched 1.81 percent, the highest since June. The price of the 1.5 percent security due in August 2026 was 97 19/32.

Treasuries remained higher after Fed Vice Chairman Stanley Fischer said in a speech Monday that government policies could partly counteract the impact of lower productivity and an aging population that are holding back the U.S. economy and weighing on interest rates.

"It seems to be a call for fiscal action as monetary policy has its limitations at the lower bound,” said Subadra Rajappa, head of U.S. rates strategy in New York at Societe Generale SA, one of 23 primary dealers that trade with the central bank. “There are no immediate implications of Fischer’s speech for rate and monetary policy, hence the muted reaction.”

Break-Even Rate

Fed fund futures indicate the probability of a rate increase by the central bank’s December meeting is about 65 percent. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase.

Regardless of when the Fed moves, this policy-tightening cycle is poised to be the slowest and shallowest in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate. The contracts imply the rate will rise to about 0.95 percent in three years from about 0.4 percent now -- essentially just two hikes during the next 36 months.

At its policy committee meeting last month, the central bank held off on raising rates and signaled a more gradual long-term tightening path than it had previously.

"You shouldn’t expect more than one or two rate hikes from the Fed in any given year going forward, unless things do pick up materially," said Gennadiy Goldberg, an interest-rate strategist in New York at TD Securities (USA) LLC, a primary dealer. 

The 10-year break-even rate, a gauge of inflation expectations that measures the difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, rose to about 1.70 percentage points, the highest closing level since April.

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