Treasuries Rise on Rate-Cut Bets; 30-Year Yields Fall to Record
By Lukanyo Mnyanda
Jan. 23 (Bloomberg) -- U.S. Treasury notes gained, pushing two-year yields to the lowest since April 2004, on speculation the Federal Reserve will keep cutting interest rates to avert a recession in the world's largest economy.
Benchmark 10-year yields dropped to the lowest since June 2003 as European stocks and futures on U.S. stock indexes declined, prompting investors to seek safety in government debt. The Fed's decision yesterday to slash the target for overnight loans between banks to 3.5 percent pushed notes to the biggest rally since the aftermath of the Sept. 11, 2001, terrorist attacks.
``There'll be more rate cuts and we'll see further declines in yields,'' said Axel Blase, a fund manager at Invesco Asset Management in Frankfurt. ``The fundamentals haven't changed and investors are more keen to play it safe.''
The two-year Treasury yield fell 13 basis points, or 0.13 percentage point, to 1.85 percent as of 9:15 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/4 percent security due December 2009 rose about 1/4, or $2.50 per $1,000 face amount, to 102 21/32.
Benchmark 30-year yields touched 4.101 percent, the lowest since regular sales began in 1977. Ten-year note yields dropped 11 basis points to 3.3 percent, the lowest since June 2003. Two- year notes yielded 1.45 percentage points less than 10-year securities, close to the biggest gap since 2004. The steeper yield curve indicates investors favor shorter-maturity debt in anticipation of lower interest rates.
`Still Positive'
Europe's government bond yield curve was at the steepest since May 2006 as German two-year note yields tumbled 23 basis points to 3.16 percent.
The Dow Jones Stoxx 600 Index of stocks, a benchmark for Europe, fell 3.44 percent, while the benchmark index in Germany, the largest of the 15 nations that share the euro, slumped 3.2 percent.
``In the short-term, we're still positive on Treasuries,'' said Sean Maloney, a fixed-income strategist in London at Nomura International Plc, a unit of Japan's largest securities company. ``It's still a antiestéticar-driven market.''
Futures contracts on the Chicago Board of Trade show a 100 percent chance the U.S. central bank will cut the target rate by at least 50 basis points to 3 percent at its meeting next week. Traders see a 34 percent likelihood the Fed will decide on a 0.75 percentage point cut when it sets rates on Jan. 30. Yesterday's 75-basis-point reduction was the first time policy makers acted between meetings since 2001.
Two-year Treasuries yielded 1.65 percentage points less than the central bank's target for overnight loans between banks. The deficit was more than 2 percentage points yesterday before the rate cut, the most since 1981.
Market Turmoil
``Market turmoil may continue to lead to further rallies in Treasuries,'' said Shinji Kunibe, who helps oversee $847 billion globally at the Tokyo branch of JPMorgan Asset Management, part of the third-biggest U.S. bank by assets.
Treasuries also got support as expectations for U.S. inflation waned, judging by yields. Treasury Inflation-Protected Securities maturing in 10 years yielded 2.19 percentage points less than regular 10-year notes, near the smallest gap since 2003. The difference, or breakeven rate, reflects the inflation rate traders expect over the next decade.