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Treasuries extend gain as Fed seen keeping rate after China cut

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(Bloomberg) — Treasuries rose for a second day on speculation the Federal Reserve will keep its benchmark interest rate at a record low at this week’s policy meeting, after China’s decision to cut borrowing costs highlighted risks to the biggest economies.

Signs of slowing U.S. growth are driving demand for the safety of government securities as a decline in Asian shares helped boost demand for the safest assets. A report showed U.S. durable-goods orders fell in September. The People’s Bank of China reduced its benchmark lending rate on Oct. 23.

“Investment activity isn’t doing all that well heading into the latter part of the year,” said Gennadiy Goldberg, an interest rates strategist in New York with TD Securities, one of the 22 primary dealers that trades with the Fed. “It’s decreasing the odds of a rate hike before year-end.”

Benchmark U.S. 10-year note yields fell three basis points, or 0.03 percentage point, to 2.03 percent as of 9:49 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 rose 7/32, or $2.19 per $1,000 face amount, to99 23/32.

Debt Ceiling

Demand for all durable goods — items meant to last at least three years — fell 1.2 percent in September, according to a Commerce Department report on Tuesday. The survey median for all durable goods orders was a 1.5 percent decrease. August bookings declined 3 percent, revised from a previously reported 2.3 percent decrease.

“Treasuries should hold onto the gains,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “I don’t think data out of the U.S. gives the Fed a reason to meaningfully shift at tomorrow’s meeting. I don’t expect the Fed to talk more hawkishly and tell the markets it’s going to raise rates this year.”

U.S. Treasury bill rates fell below zero after an agreement between the White House and top lawmakers from both parties that will avert a debt default after Nov. 3. The yield on bills maturing Nov. 12 was at negative 0.01 percent, from 0.14 percent at the end of last week.

The accord will extend the government’s borrowing authority until March 2017 and include a two-year deal on spending, aides from both parties said. House and Senate Republican leaders presented the plan to members Monday night and a draft of the bill was later posted on the White House website.

Rate Odds

The probability the U.S. central bank will increase the benchmark by its December policy meeting is 33 percent, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current zero to 0.25 percent target range.

U.S. government yields aren’t enough for Park Sungjin, the head of investment management in Seoul at Meritz Securities Co., which has $7 billion in assets. The Fed is still poised to lift rates, even if policy makers don’t act until next year, he said.

“It will hurt quality bonds like Treasuries,” Park said. “I won’t buy Treasuries. The yield level is not enough.” Park says he’s buying commodities, especially oil, which he says is bottoming out after an almost 50 percent decline over the past year.

–With assistance from Wes Goodman in Singapore.