Treasuries outlook: yields plunge in line with oil drop

13 Dec, 2015

Yields on long-dated US Treasury debt declined to multi-week lows on Friday, as an extended drop in oil prices and weak stock markets spurred investors to seek the relative safety of government bonds. The slide in oil prices in particular suggested that inflation remains subdued, which bodes well for the long-end of the curve because it keeps bond returns more or less intact.
Benchmark US 10-year Treasury note yields, which move inversely to prices, dropped to a five-week low, while yields on 30-year bonds fell to a six-week trough. "Most of this is driven by the sharp decline in oil prices given that there's no major change in Fed expectations," said Cheng Chen, interest rates strategist, at TD Securities in New York.
Investors have pretty much fully priced in an interest rate hike from the US Federal Reserve next week, and the debate has largely shifted to how many rate increases there may be in 2016. Oil prices dropped close to 11-year lows on Friday, after the International Energy Agency warned that global oversupply of crude could worsen next year. Brent crude slipped below $38 per barrel for the first time since December 2008.
In late trading, US 10-year notes rose 28/32 in price to yield 2.137 percent, down from Thursday's 2.237 percent. Yields had briefly edged higher after data showed retail sales, excluding automobiles, gasoline, building materials and food services, increased 0.6 percent after gaining 0.2 percent in October.In absolute terms, US 10-year yields on Friday posted their largest one-day fall since early July. The 30-year bond climbed more than 1 point in price to yield 2.877 percent, down from 2.969 percent Thursday. It was the bond yield's worst one-day fall in 2-1/2 months.
US five-year notes fell 16/32 in price to yield 1.572 percent, down from 1.684 percent late on Thursday. US two-year notes, meanwhile, rose 3/32 in price, yielding 0.899 percent, down from Thursday's yield of 0.959 percent. Societe Generale said in a research note it expects the front end of the curve to "look rather pegged," ahead of the Fed meeting next week, reflecting a market that has fully priced in a December lift-off. It forecast about seven hikes over the next four years.

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