U.S Treasuries Continue Their Price Rally

U.S. Treasuries advanced for a fifth day, extending their winning start to 2016, as oil prices at the lowest level in more than a decade added to reasons for investors be bearish on the outlook for inflation and global economic growth.

Gains by benchmark Treasury 10-year notes pushed the yield to a two-week low as North Korea’s claim that it tested its first hydrogen bomb and China’s move to weaken its currency spurred demand for fixed-income assets. U.S. government debt has eked out a positive return since Dec. 16, the day the Federal Reserve raised interest rates for the first time in almost a decade, amid speculation future increases in benchmark rates will be slower than officials currently estimate. German and U.K. bonds also advanced.

“The strength in core bonds, such as Treasuries, is mainly due to sentiment in risk markets,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “Then of course there is the oil price. Those are the two main elements. For the Fed it’s too early to draw conclusions or to change thinking” on the tightening cycle, he said.

Treasuries remained higher even after a report showed U.S. employers added more workers than projected in December. Other reports Wednesday will signal improvements in services in December and show factory orders slid in November, according to economists in separate Bloomberg surveys. The data add to an uncertain picture confronting Fed officials, who are due to release the minutes of the December meeting on Wednesday.

The 10-year note yield declined four basis points, or 0.04 percentage point, to 2.20 percent as of 8:36 a.m. in New York, according to Bloomberg Bond Trader data, pushing the drop since Dec. 29 to 12 basis points. The 2.25 percent note due in November 2025 advanced 10/32, or $3.13 per $1,000 face amount, to 100 14/32.

Brent crude oil dropped to an 11-year low before weekly U.S. government data forecast to show fuel supplies rose in the world’s biggest consuming nation.

The derivatives market is pricing in about two Fed increases this year, compared with the four moves that Fed officials laid out in their latest quarterly forecasts. Interest-rate derivatives traders see the effective fed funds rate at about 0.9 percent in a year’s time. The median outlook of central bank officials is for 1.375 percent at the end of 2016.

Bloomberg

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