Tags: Treasurys | bonds | market | Federal Reserve

Treasurys Rally Biggest Since 2009 Amid Fed Capitulation Trade

Wednesday, 15 October 2014 03:21 PM

Treasurys surged, with benchmark 10-year yields falling the most since March 2009, as a decline in retail sales prompted traders to reduce wagers the Federal Reserve will raise interest rates in 2015.

Rates on federal fund futures show traders betting that the Fed will raise interest rates in December 2015, with chances of an increase in September fading to 32 percent from 46 percent yesterday and 67 percent two months ago, according to data compiled by Bloomberg. The benchmark 10-year yield traded below 2 percent for the first time since June 2013 even as the Fed is forecast to end its quantitative easing this month. A market gauge of inflation expectations fell to the lowest in 15 months while crude oil tumbled in a bear market.

“Everybody is finding something to worry about,” said Robert Tipp, chief investment strategist in Newark, New Jersey for Prudential Financial Inc.’s fixed-income division, which oversees $533 billion in bonds. “People who were concerned an end of QE would lead to a correction of the risk markets are getting their validation.”

The benchmark 10-year yield fell 14 basis points, or 0.14 percentage points, to 2.06 percent as of 2:17 p.m. New York time and reached the lowest since May 2013. The 2.375 percent note due in August 2024 rose 1 1/4, or $12.50 per $1,000 face value, to 102 26/32. The yield fell as much as 34 basis points and reached 1.86 percent, the lowest level since May 2013.

Bond Rally

The 30-year bond rose more than four points and the yield fell as much as 28 basis points to 2.67 percent, touching the lowest level since September 2012, before trading at 2.83 percent.

Treasury trading volume reached the highest on record as about $777 billion in U.S. government debt changed hands by 2 p.m., according to ICAP Plc, the world’s largest interdealer broker. That exceeds the $662.2 billion traded on May 22, 2013, when former Fed Chairman Ben S. Bernanke mentioned the possibility of slowing bond purchases.

Hedge-fund managers and other large speculators as of Oct. 7 had increased bearish bets on 10-year note futures to the most since July, U.S. Commodity Futures Trading Commission data show. The number of net-short positions reached 92,329 contracts, an increase of 79,824 from the week before.

“We are seeing massive capitulation,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “Given the weakness in the data, the continued geopolitical risk, the turn in consumer sentiment and consumption, everything is coming together to ignite the safe-haven trade. Volatility in risk markets is providing more fuel for the rally.”

Fed Policy

Rates on federal fund futures show the chances for an increase in December 2015 were 54 percent, making it the first instance for a likely central bank move. The Fed has expanded its balance sheet assets to $4.5 trillion from less than $1 trillion in 2008 in an effort to stimulate growth after the global financial crisis.

A measure of Treasury volatility increased for a third day yesterday to the highest level in more than nine months. Bank of America Merrill Lynch’s MOVE Index, which measures price swings based on options, climbed to 74.6 basis points yesterday, the most since Jan. 8.

The 10-year break-even rate, derived from the difference between yields on Treasurys and inflation-linked debt of similar maturities, shrank to 1.86 percentage points, the least since June 2013.

’Extremely Swift’

“The move has been very extremely swift, and large,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “There is good room to move lower in yield. We are seeing a repricing of Fed expectation for years out. A lot of the pieces of the puzzle are falling into place in a negative way.”

The budget deficit in the U.S. shrank to the lowest level as a share of the economy since 2007 in fiscal 2014 as faster growth and falling unemployment boosted tax receipts, the Treasury Department said.

The shortfall was $483.4 billion in the 12 months to Sept. 30, compared with $680.2 billion a year earlier, the Treasury said today in Washington. That’s about a third of the record $1.4 trillion deficit reached in 2009. Revenue jumped 8.9 percent and spending gained 1.4 percent, the figures showed.

Data this week has shown German investor confidence slid to the weakest level in almost two years, U.K. inflation unexpectedly stalled and China’s consumer-price gains declined to the lowest in five months.

Fischer Speech

Fed Vice Chairman Stanley Fischer in an Oct. 11 speech noted concern the global economy is slowing, fueling speculation the central bank will push back the timing for raising interest rates.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in a speech at the International Monetary Fund’s annual meetings in Washington.

West Texas Intermediate crude headed to $80 a barrel for the first time in 27 months as rising U.S. production increased supplies. Brent extended its biggest one-day decline in three years.

Both grades have collapsed into a bear market as shale supplies boost U.S. output to the most in almost 30 years and global demand growth weakens. The largest OPEC producers are responding by cutting prices, sparking speculation that they will compete for market share rather than reduce supply.

Retail sales declined 0.3 percent after a 0.6 percent August gain that was the biggest in four months, Commerce Department figures showed. The median forecast of 81 economists surveyed by Bloomberg called for a 0.1 percent decline.

“These are crazy, out of control moves in the market,” said Andrew Brenner, the head of international fixed income for National Alliance Capital Markets. “Almost everyone was looking for higher rates, and when you have everyone looking one way, and things start unraveling, they unravel big.”


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Treasurys surged, with benchmark 10-year yields falling the most since March 2009, as a decline in retail sales prompted traders to reduce wagers the Federal Reserve will raise interest rates in 2015.Rates on federal fund futures show traders betting that the Fed will raise...
Treasurys, bonds, market, Federal Reserve
Wednesday, 15 October 2014 03:21 PM
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