U.S. Treasuries Stage Longest Rally In 2 Years On China Unrest

Treasuries advanced for a sixth day, the longest winning streak in 13 months, as turmoil in Chinese markets drove demand for the relative safety of government debt.

From 2-Year notes to 30-Year bonds, yields are below their levels on December 16 when the Federal Reserve increased its benchmark rate for the first time in almost a decade. Chinese stock exchanges closed early for the second time this week after the CSI 300 Index plunged 7 percent. China’s central bank is guiding its currency lower, raising speculation the steps reflect rising concern over slowing growth.

“Some of the buying is from the demand for safety,” said Will Tseng, a fund manager in Taipei at Mirae Asset Global Investments, which oversees $73 billion. Investors are “hesitant” to hold riskier assets, he said.

The 10-Year note yield declined four basis points to 2.14 percent as of 8:45 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 rose 11/32, or $3.44 per $1,000 face amount, to 101 1/32.

The last time the benchmark note climbed for six days was November 2014. The yield has fallen from 2.30 percent when the Fed shifted rates on Dec. 16. Mirae’s Tseng predicts it will increase to 2.60 percent by year-end.

Treasuries have returned 0.5 percent this month, versus 0.9 percent for all of 2015, based on Bloomberg World Bond Indexes. The China unrest combined with stagnant inflation are driving speculation the Fed will fall short of its intent to raise rates four more times in 2016. Pacific Investment Management Co. says it expects two or three increases.

This week’s market moves echo the rout in Chinese shares last August which drove stocks down around the world and spurred the Fed at its September meeting to cite “global economic and financial developments” in deciding against raising rates. It waited until December for liftoff.

In the minutes of the December meeting, issued Wednesday, almost all participants agreed inflation would accelerate toward their 2-percent goal, from the current level of about zero, though many expressed concern it will take longer than previously expected.

“Yields are going lower after the Fed hike,” said Hajime Nagata, a bond investor in Tokyo at Diam Co., which oversees $146 billion. “The market is expecting lower inflation numbers than the Fed is expecting. The pace of the hikes really depends on inflation.” Chair Janet Yellen will move “at most two times” this year, he said. Ten-year yields will fall to 1.80 percent in 2016, he said.

The U.S. central bank has missed its 2-percent inflation target for more than three years, as slumping oil and commodities and a stronger US dollar kept a lid on prices.

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“The Fed says they’d like to do four hikes, but you know, I’d like to play third base for the Yankees, and it’s not going to happen,” Richard Clarida, Pimco’s New York-based global strategic adviser, said in an interview Wednesday. “If we do get four hikes, then I’ll be thrilled because it’ll mean the economy is booming. Our view is the economy’s plodding along.”