This is turning out to be a year that few predicted in the world’s biggest bond market. In January, a Bloomberg survey of economists projected yields would climb through the course of this year, as the US Federal Reserve ended its zero-rate policy.
Instead, the benchmark yield is declining as investors question how quickly the central bank can move against a backdrop of slow inflation and a stuttering global economy.
Treasuries have returned 0.7 percent this week, the steepest advance in about a month and an half, according to Bloomberg bond indices. They have earned 1.9 percent this year.
The US Department of Labor’s monthly payrolls report yesterday showed average hourly earnings growth slowed to 0.2 percent last month, from 0.3 percent the previous month, based on a Bloomberg survey. Job gains quickened to 197,000 from 140,000, a separate survey showed.
“I can only see deflation pressures [in the US],” said Yusuke Ito, a senior investor at Tokyo-based Mizuho Asset Management, which oversees US$29 billion.
“The expectation that the world economy is going to recover is receding. Long-term Treasuries are the best bet in the market,” he said.
Treasuries were little changed yesterday with the 10-year note yield at 2.05 percent as of 7:01am in London, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 99 18/32.
The yield dropped to a five-week low of 2.01 percent on Thursday.
At the start of this year, analysts had predicted it would increase to 2.65 percent by the end of the third quarter.
The difference between yields on 10-year notes and similar-maturity US Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has shrunk to 1.46 percentage points from this year’s high of 1.97 set in April.
China has been the biggest source of anxiety for investors, after turmoil in the nation’s financial markets fueled concern that an economic slowdown in the nation is deepening.
Yields are falling even as Fed officials try to prepare investors for a rate increase.
San Francisco Federal Reserve President John Williams said on Thursday that risks to the economy from developments abroad have not worsened and domestic conditions remain positive, while repeating his call to raise rates this year.
Fed Chair Janet Yellen and New York Fed President William Dudley have also argued for a shift this year in speeches following the latest policy meeting on Sept. 16 to Sept. 17.
There is an 18 percent chance the Fed will move by its October meeting, according to futures data compiled by Bloomberg.
The odds are 44 percent by the following session in December. The calculation is based on the assumption that the effective fed funds rate would average 0.375 percent after liftoff.
Yesterday’s employment report might change those odds, said Kim Youngsung, head of overseas investment in Seoul at the Government Employees Pension Service.
“The Fed’s dependent on the data,” he said.
“If it’s better than expected, then it’ll be easier to raise interest rates in October. If it’s weaker than expected, December will be more likely,” he said.
Economists are sticking with their forecasts for yields to rise. The 10-year yield is likely to climb to 2.43 percent by year-end, according to Bloomberg surveys, with the most recent forecasts given the heaviest weightings.
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